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Should Environmental Standards be Tighter if Technological Change is Endogenous?

  • Ecology
  • Economics
  • Geography


Should Environmental Standards be Tighter if Technological Change is Endogenous? Sjak Smulders* Faculty of Economics and CentER Tilburg University e-mail: [email protected] This version: September 1997 Abstract This paper develops a growth model in which pollution, environmental quality and accumulation of clean technologies are endogenous. It is examined how the optimal environmental policy changes if the contribution of endogenous technological progress to total productivity growth increases. Short-run pollution reduction should be larger. However, optimal emission reduction rates in the long run may be lower because endogenous technology imposes a larger burden of investment and implies a larger persistence of the adverse effects of emission reductions on productivity. Only if growth is endogenous and long-run productivity falls as a result of environmental policy, also the steady state optimal level of environmental quality is higher because of endogenous technological change. Hence, this paper argues that endogenous technological change urges for early action and disfavors a wait-and-see strategy. Keywords: optimal environmental standard, endogenous technological progress, induced technological change, endogenous growth. JEL codes: Q28, O41. ERN fields: Environmental Economics, Macroeconomics. S)))Q * The author thanks Larry Goulder, Stanford University, for many stimulating discussions on technological change and the environment, and Cees Withagen, Ton van Schaik and Jeroen van den Bergh for useful comments on an earlier draft. Also comments during the EAERE conference (Tilburg, June 1997) and EEA97 conference (Toulouse September 1997) are much appreciated. 1 Optimal (sustainable) per capita consumption levels are more sensitive to technological parameters than to1 any other type of parameters in the empirically calibrated DICE model. Optimal sustainable output levels and CO2 emission reduction rates are most sensitive to population growth and discount rate, b

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