Phasing Out a Polluting Input
- Publisher: Mälardalens högskola, Industriell ekonomi och organisation
Technological Change | Pollution | Energy substitution | Growth drag | Economics | Nationalekonomi
This paper explores economic policies related to the potential conflict between economic growth and the environment. It applies a model with directed technological change and focuses on the case with low elasticity of substitution between clean and dirty inputs in production. New technology is substituted for the polluting input, which results in a gradual decline in pollution along the optimal long-run growth path. In contrast to some recent work, the era of pollution and environmental policy is here not just a transitory phase in economic development. The optimal policy includes a perpetual subsidy to `green' research. The tax rate of pollution is monotonously increasing, while the pollution tax payments constitute a constant share of income. These policies result in a quite modest growth drag.