Endogenous Growth with a Ceiling on the Stock of Pollution

Abstract

The effects of an agreement such as the Kyoto Protocol, which implicitly imposes a ceiling on the stock of pollution, have recently been studied in Hotelling models. We add pollution and a ceiling to the endogenous growth model of Tsur and Zemel (J Environ Econ Manag 49(3):484–499, 2005) to study the effects of the ceiling (and pollution) on capital and research investments. In the short run, the ceiling adds an additional scarcity to the one induced by the limited fossil fuel stock. Ceteris paribus, the extraction rate of cheap fossil fuel is reduced and backstop utilization boosted. This increases energy costs (energy cost effect) and makes R&D more beneficial compared with capital accumulation (research effect). R&D investments may increase, depending on capital endowment and the strength of the two effects. The sum of R&D and capital investments is affected, as both effects change disposable production. In the long-run, i.e. after the exhaustion of limited resources, the shape of the evolution path can be only affected by the ceiling, if the capital endowment is sufficiently large.