Environmental policy effects: an R&D-based economic growth model with endogenous labour supply

ABSTRACT

We investigate the effect of environmental policy on economic growth by using an R&D-based growth model with endogenous labour supply and conducting a numerical analysis. The model brings together two channels for substituting polluting capital inputs: A static channel and a dynamic channel. A decrease in pollution permit levels indicates a direct effect on reducing growth rate and an indirect effect on rising growth rate via the two channels. Under the assumed functional forms of abatement and production technologies, the indirect effect dominates the direct effect at equilibrium. Thus, the policy can raise growth rate and improve welfare.

KEYWORDS:

• Labour supply
• pollution permit
• innovation
• economic growth

JEL:

• J22
• O31
• Q58.

Acknowledgements

The author is grateful to Koichi Futagami for his valuable advice. Additionally, the author sincerely thanks Yutaro Hatta, Yuki Uchida, and Yasukatsu Moridera for their assignments. The author particularly thanks three anonymous referees for detailed comments and suggestions. The author is responsible for all errors in this article.

Disclosure statement

No potential conflict of interest was reported by the author.

Supplementary material

Supplemental data for this article can be accessed here.

Notes

1. In the present model, reducing the level of pollution permit decreases pollution by employing the abatement good as an end-of-pipe technology.

2. Pautrel (2009) analyses a positive effect of the environmental tax rate on the growth rate in a continuous overlapping generations model and obtains an explicit analytical result. However, he fails to provide a full characterization of the region of parameters where the main analytical result holds. Since it is difficult to provide a full characterization of the region of parameters wherein the main numerical result holds, which produces explicit analytical results in the aforementioned study, we conduct a numerical analysis.

3. Oueslati (2002) obtains the value of final output per unit of physical capital stock and the value of the share of pollution abatement in production through the calibration. Using the two values, we can obtain the value of a unit of physical capital stock per pollution abatement. This value is equal to the pollution permit level at equilibrium in the present model. Thus, we set $\bar{P}=0.001981$ as the benchmark parameter.

4. We thank an anonymous referee for this comment.

5. We are thankful to referees for suggesting that we add the results of the sensitivity analysis to this paper.