Directed Technical Change, Environmental Sustainability, and Population Growth
Abstract: Population growth has two potentially counteracting effects on pollution emission: (1) more people implies more production and thereby more emission, and (2) more people implies a larger research capacity which might reduce the production emission intensity, depending on the direction of research. This paper investigates how to achieve a given climate goal in the presence of these two effects. A growth model featuring both directed technical change and population growth is developed. Consistent with empirical evidence, the model features simultaneous research in polluting and non-polluting technologies in the absence of severe policy interventions. In the empirically plausible case, population growth has a positive net effect on pollution emission even when research is directed only toward non-polluting technologies. Thus research subsidies alone are ineffectual environmental policy tools. Instead, the analysis highlights pollution taxes and population control policies as effective environmental policy tools.
Endogenizing the cap in a cap-and-trade system: Assessing the agreement on EU ETS phase 4 (with Ulrik R. Beck)
Abstract: In early 2018, a reform of the world’s largest functioning greenhouse gas emissions cap-and-trade system, the EU Emissions Trading System (ETS), was formally approved. The reform changes the main principles of the system by endogenizing the previously fixed emissions cap. We show that the effective emissions cap is now affected by the allowance demand and therefore not set directly by EU policymakers. One consequence of this is that national policies that reduce allowance demand can reduce long-run cumulative emissions, which is not possible in a standard cap-and-trade system. Using a newly developed dynamic model of the EU ETS, we show that policies reducing allowance demand can have substantial effects on cumulative emissions. Our model simulations also suggest that the reform reduces aggregate emissions in both the short and long run, but the long-run impact is substantially larger. Yet, the reform has a small impact on the currently large allowance surplus.
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Directed Technical Change and Economic Growth Effects of Environmental Policy
Abstract: A Schumpeterian growth model is developed to investigate how environmental policy affects economic growth when environmental policy also affects the direction of technical change. In contrast to previous models, production and pollution abatement technologies are embodied in separate intermediate good types. A set of stylized facts related to pollution emission, environmental policy, and pollution abatement expenditures is presented, and it is shown that the developed model is consistent with these stylized facts. It is shown analytically that a tightening of the environmental policy unambiguously directs research efforts toward pollution abatement technologies and away from production technologies. This directed technical change reduces economic growth and pollution emission growth. Simulation results indicate that even large environmental policy reforms have small economic growth effects. However, these economic growth effects have relatively large welfare effects which suggest that static models and exogenous growth models leave out an important welfare effect of environmental policy.
On the Plausible Case of Less-than-exponential Economic Growth
Abstract: A general R&D-based endogenous growth model nesting well-known models of exponential economic growth as well as a model exhibiting less-than-exponential economic growth is developed. The model is estimated using US data for the period 1960-2013, and the parameter estimates support the case of less-than-exponential economic growth.