Abstract
The relationship between the economy and the environment is not straightforward and is influenced by a multitude of factors. Ideally, economic growth would not damage environmental quality and environmental protection would not hinder economic growth. Achieving this decoupling often requires environmental policy, but the analysis of specific policy instruments and their necessary levels to achieve it is rare. In this paper, we use a stylized equilibrium model to explore distinct policy instruments under which relative decoupling and absolute decoupling between economic growth and emissions occur. In our model, final-goods production uses polluting (non-renewable) and non-polluting (renewable) resources. The government taxes emissions and subsidizes renewables production. In the empirical application, we focus on the case of electricity generation. Results show that, with a growing subsidy, relative decoupling exists. Achieving absolute decoupling is harder, but it occurs for a certain interval of the subsidy growth rate. For that purpose, the choice of the tax and subsidy growth rates is more important than the choice of the initial levels for these instruments. The choice of the subsidy growth rate indicates the prioritization between the economy and the environment. A lower subsidy growth rate favors the environment, while a higher one favors the economy. The tax growth rate dictates the distance between the output growth rate and the emissions growth rate. The higher the tax growth rate, the higher the difference between them. In sum, the government can decide between attaining higher output growth rates, higher emissions decreasing rates, or an intermediate situation.
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Notes
In the context of an endogenous growth model where the steady state is emphasized—that is, the long run is analyzed—this assumption is required.
We abstract from aspects such as population growth and the inclusion of other production factors in order to isolate the effects of natural resources on economic growth and the environment.
We also considered the possibility of monopoly power for resources firms, both in the renewables and non-renewables sector, but qualitatively results remained unchanged, while calculations became more complicated. Hence, for simplification, we maintained perfect competition as the benchmark.
Where \(g_{x}\) is the growth rate of the variable \(x\).
The most recent corresponding report from NEA, IEA, and OECD, which is from 2015, indicates that coal remains cheaper than wind power in terms of levelized costs (with a cost of $0.02893/kWh as opposed to $0.04894/kWh). Hence, the cost gap decreased but still exists. Qualitatively, our results remain unchanged.
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Acknowledgements
Susana Silva gratefully acknowledges the financial support of “Fundação para a Ciência e Tecnologia” (FCT—Portugal), through the Grant SFRH/BPD/86707/2012.
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Appendix
Appendix
1.1 Derivation of the output and emissions growth rates
Replacing (6) on (11), we obtain:
From (10), we have:
From (9), we know that:
Replacing (21) into (20), we obtain the economic growth rate:
From (12), we know that \(g_{F} = \frac{{g_{Y} - \alpha g_{R} }}{1 - \alpha }.\). Replacing (22) into this expression, we have:
Using (10) for the expression of \(g_{R}\) and replacing it into (23), after some algebra, we obtain the expression of the growth of fossil fuels use, which is equal to the growth rate of emissions:
Finally, replacing the expression of \(\dot{\lambda }\), we obtain:
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Silva, S., Soares, I. & Afonso, O. Decoupling economic growth from emissions: the case of policies promoting resource substitution. Environ Dev Sustain 23, 8331–8347 (2021). https://doi.org/10.1007/s10668-020-00967-9
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DOI: https://doi.org/10.1007/s10668-020-00967-9