Optimality, Hartwick's Rule, and Instruments of Sustainability Policy and Environmental Policy

Abstract

We consider a closed, constant-technology, capital-resource economy with resource stock amenity value, which would otherwise aim for conventionally, PV-optimal development that maximises the present value of utility using a constant discount rate. In this economy, we calculate the decentralised policy instruments needed to achieve continuously zero net investment, and hence (by Hartwick's rule) sustainability in the form of constant utility. We also calculate the environmental policy needed to internalise the resource's amenity value: its natural form is a subsidy on holding the stock. The sustainability policy comprises this stock subsidy (needed if sustainability is to be maximal, though the subsidy will be at a different level from that for environmental policy alone); and a consumption tax which ultimately falls towards a 100% subsidy. The latter gives agents the incentive needed to invest when the return on capital is less than the utility discount rate. Neither a resource flow tax nor the resource stock subsidy on its own has any power to achieve sustainability. As a preliminary, we clarify some confusion in the literature about the relationship between PV-optimality and Hartwick's Rule, using an exact solution for illustration.