Optimal waste control with abatement capital

Abstract

In this paper, we address the question of how “green” growth differs from other patterns of economic growth. To this aim we analyze the control problem of a social optimum with waste, abatement and productive capital stocks. Consumption generates waste. We have two main results: (1) An environmental Keynes-Ramsey rule showing how along the transitional path, consumption dynamics is affected by capital and waste. One crucial implication is that faster waste emissions do not always call for faster abatement investment, and this effect can generate an overshooting in waste and productive capital stock, not present in the standard Keynes-Ramsey model. (2) In the steady state both productive capital stock and output are unchanged relative to the standard Ramsey model; nonetheless, the output composition changes since, to make room for abatement investment, steady state consumption must be reduced. We stress that, when abatement activities are treated as flows, the benefits and costs of abatement capital are greatly undervalued. It is the marginal impact of the whole abatement stock that impinges upon waste accumulation and current consumption, not only the additional unit of abatement activity.