Long-run sustainability in the green Solow model

The aim of this work is to advance the analytical framework of green growth and to shed light on the concept of long run sustainability maintaining a tight connection to environmental data. In a relatively recent study, Brock and Taylor (Journal of Economic Growth 2010) developed an augmented Solow model where exogenous technological progress in both production goods and abatement leads to perpetual growth with rising environmental quality. They found that the Environmental Kuznets Curve (EKC) is a necessary by product of convergence to a sustainable growth path.

We propose to go beyond the green Solow model of Brock and Taylor to examine the concept of sustainability they use in a richer Ramsey framework. Mainly we analyze the costs and benefits of economic growth from an economic welfare perspective to evaluate whether growth is really economic or ‘uneconomic’ along the possible balanced growth paths. We calibrate the model for the US economy using data from the Environmental Protection Agency and the World Input-Output Database. We expect to obtain a sustainability and welfare ranking of possible long-run outcomes for plausible parameter values.

Second, we extend the model to an endogenous technological growth setup and explore how much of the technological progress can be induced by tightened government policy, driving the economy to a sustainable long run equilibrium. In particular we want to explore whether environmental policy can have growth effects in the long run and to quantify these effects. In Brock and Taylor’s model, environmental policy has a level but not a growth effect. We expect to obtain significant quantitative growth effects.