# **1. Introduction**

This paper analyzes decisions to undertake major infrastructure investments, where such investments commit society to sustained, possibly high, levels of fossil-fuel energy use and corresponding greenhouse gas (GHG) emissions, for a long future period.<sup>1</sup> This issue is of high concern in a climate policy context. The commitment of society to high levels of GHG emissions for long future periods makes it more difficult to reach ambitious climate policy targets later down the road, once major energy-demanding infrastructure investments have been sunk. As a consequence, great caution must be shown at the time when such investments are made.

This paper complements a recent paper on the topic by Shalizi and Lecocq (2009), which provides a broader, largely verbal and illustrative, discussion. I here provide an analytical elaboration of some central issues in the Shalizi-Lecocq paper; in particular, I build a foundation for analyzing when the respective infrastructure investment decisions will be efficient or inefficient, from an ex ante point of view (thus, based on the information available when the investment is made), and from a climate policy consideration.

Several infrastructure investment types are relevant for such an analysis.<sup>2</sup> They are mainly related either to energy supply, or to energy demand. Energy supply infrastructure is concentrated to electricity generation facilities, other energy production facilities, and energy distribution systems. “Long-lasting” energy demand infrastructure is heavily concentrated to the transport and household sectors, including urban and housing structure, and basic systems of transport (such as the balance between public and private transport). Shorter-lasting infrastructure includes the stocks of motor vehicles and household appliances, and home heating and cooling systems.<sup>3</sup> These are very broad categories of investments, which overall comprise a large share of society’s investment, and concern a big fraction of the overall GHG emissions from fossil fuel consumption. Depending on how widely we define such investments to apply, half or even more of total carbon emissions could be defined as affected by this type of analysis. This makes infrastructure investments of the type discussed here extraordinarily important for climate policy in a long-run context.

I here first raise the question what is “sound” (or “efficient”) infrastructure, from the point of view of climate policy.<sup>4</sup> Since infrastructure policy requires considerations for long future periods (possibly, up to 100 years or more), and thus under conditions of great uncertainty, this question is complex and often has no straightforward or unambiguous answer.

A second issue is whether actual policy decisions regarding energy-demanding infrastructure investments are likely to follow the rules we derive for “sound” (or efficient) policy; and if not, why not. A main conclusion is that policy is likely to be inefficient, in a wide range of circumstances and for several reasons; and that the policy error tends to be on the side of too high energy (and carbon) intensity. In large measure, however, the problem is that price

> 1 This paper draws on two more technical studies, Strand and Miller (2010) and Framstad and Strand (2010). These papers take up more specific analytical issues that are touched on only briefly here.

> 2 Further discussion of infrastructure investment types is provided by Shalizi and Lecocq (2009).

> 3 A slightly different categorization, based on the longevity of the capital stock, is found in Jaccard (1997), and Jaccard and Rivers (2007). 4 A seminal discussion of principles behind achievement or non-achievement of “efficiency” in this context is provided by Leibowitz and Margulis (1995).