Abstract
We study how public policies affects an economy where production emits pollutants and investment in productive assets raises the economy’s overall productivity. We explore two hypotheses about how the accumulation of pollutants affects human well-being. Under the first one, there is no limit to the possibility for households to defend themselves against environmental degradation by increasing the use of manmade artifacts, while under the second one there is a threshold beyond which the effects of the accumulation of pollutants cannot be offset by devoting more output to this scope. Under both hypotheses, we compare the laissez-faire (LF) to the socially optimal (SO) path. Then, we check whether the latter can be decentralized by using the policy instruments available to the government. Under the first hypothesis, GDP and pollutants grow slower along the SO balanced growth path (BGP) than along the LF BGP, while people’s well-being is greater along the former. Therefore, green policies driving the economy along its OP tend to reduce GDP growth. Under the second hypothesis, LF may lead to a “climate catastrophe” by determining unbounded growth, which—without incentives to invest in green technology—drives the amount of pollutants beyond its maximum compatible with life on earth.
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Notes
- 1.
For a synthetic review of this literature, see Schumacher (2019).
- 2.
Consistently with this formal set-up, one can interpret technological progress as labor augmenting.
- 3.
This amounts to say that technological progress is endogenous to the economy, although it is an unintended by-products of firms’ capital investment rather than the result of purposive R&D efforts.
- 4.
Interpreting St as the CO2 concentration in the atmosphere at time t, our equation simplifies the formal treatment of the carbon cycle contained in the RICE/DICE model, in which three CO2 reservoirs are considered: the atmosphere, the biosphere and upper layers of the ocean, and the deep ocean (for a discussion see Hassler & Krusell, 2018).
- 5.
As in Barro and Sala-i-Martin (1995, p. 120), we assume that the firms’ net cash flow is paid out as dividends to the shareholders.
- 6.
As defined by Leipert, “Defensive expenditures comprise those economic activities by which we defend ourselves against the unwanted side effects (negative external effects) of our aggregate production and consumption. They are understood as expenditures to cure, neutralize, eliminate, avoid, and anticipate burdens on and damage to the environment (and living conditions in general) caused by the economic process in industrial countries.” (Leipert & Pulselli, 2008, p. 154).
- 7.
One could argue that, if we want to model the effects of global warming on human well being, it would be more appropriate to insert the earth’s global average temperature in Eq. (12b) instead of the stock of pollutants St, that in this context can be approximated by the concentration of CO2 in the atmosphere. However, an acceptable approximation to the relation linking the global average temperature to CO2 is that the temperature increase over any time period is proportional to the accumulated emissions of CO2 over the same period, with the proportionality factor that is independent of the length of the time period and of previous emissions (see Matthews et al., 2009). Thus, considering that the relationship between pollution stock (CO2 concentration) and temperature is approximately linear, one may omit to introduce a separate variable for temperature (see Bretschger & Karydas, 2019).
- 8.
It goes without saying that any calibration of the model with real world data has to deal with the uncertainty surrounding all the parameters values; in particular, this applies to the tipping point M, whose existence is not recognized by all the scholars on climate change.
- 9.
The households’ budget constraint (14) implicitly assumes the existence of a non-arbitrage condition that equalizes the rate of return on the corporate bonds and the rate of return on the government bonds.
- 10.
All derivations are available on request from the authors.
- 11.
Since, along the BGP, consumption and the stock of pollutants grow at the same rate, while leisure is constant.
- 12.
In general, as pointed out by Golosov et al. (2014), it is far from clear that there should be a favorable treatment of green R&D in the presence of an optimal emission tax, which is justified in Acemoglu et al. (2012) by assuming a built-in path dependence that over time would lead to a disaster, motivating early efforts to switch alternatives.
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Bonatti, L., Lorenzetti, L.A. (2022). Public Policies and Long-Run Growth in a Model with Environmental Degradation. In: Paganetto, L. (eds) Economic Challenges for Europe After the Pandemic. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-031-10302-5_8
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