Environmental Pollution in a Growing Economy with Endogenous Structural Change

Abstract

In this paper we study the impact of environmental pollution in an endogenous growth model with endogenous structural change. The paper allows for both horizontal and vertical innovations where newer technologies are less polluting compared to older ones. The analysis shows that the presence of environmental externalities stimulates structural change but reduces the growth rate of the economy. Further, comparing the models with and without structural change demonstrates that the latter implies stronger environmental damages and, consequently, a lower growth rate than the first one. Finally, levying a tax on the polluting output speeds up structural change, thus, reducing environmental pollution and spurring economic growth.