Working Paper: CEPR ID: DP17368
Authors: Michael Burda; Leopold Zessnerspitzenberg
Abstract: The existence of an environmental limit changes fundamentally the nature of economic growth. When atmospheric greenhouse gases reach a predetermined absolute threshold, further growth requires a permanently expanding, resource-intensive mitigation effort. We incorporate anthropogenic climate change and its mitigation into the Solow-Swan growth model and show that if the rate of technical progress in mitigation fails to exceed a critical value, the economy behaves as described by Baumol (1967). Economic growth in this regime is then driven by technological progress in mitigation and the dynamics of its relative price. Even in the extreme case that long-run growth of produced output converges to zero, the growth rate of GDP measured in terms of produced goods does not.
Keywords: Solow-Swan growth model; Baumol model; anthropogenic climate change; mitigation; price-driven economic growth
JEL Codes: O44; Q01; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rate of technological progress in mitigation (O33) | growth of produced output (E23) |
| critical threshold of greenhouse gases (Q54) | resource-intensive mitigation effort (Q54) |
| productivity in mitigation grows slower than in goods production (O49) | long-run growth in output converges to rate of technological progress in mitigation (O49) |
| population growth (J11) | impact of environmental limits (F64) |
| rate of technological progress in mitigation (O33) | characteristics of Baumol's cost disease (E31) |