Is the Environment Compatible with Growth? Adopting an Integrated Framework for Sustainability

This review develops an integrated baseline model to assess the trade-offs between the natural environment and economic growth. Consumption growth is considered in terms of both welfare and sustainability. The framework features capital accumulation and the sectoral structure of the economy as key elements to cope with resource scarcity and pollution. Model extensions that vary the number of sectors and inputs, change functional forms, and introduce poor input substitution and population growth are presented. This framework highlights the dual role of inputs as a source of environmental problems and part of the solution; it also addresses uncertainty and momentum effects. This review concludes that the environment and economic growth can be compatible but that small deviations from the optimal paths might entail unsustainable development. Critical issues for sustainability include insufficient foresight, increasing damage intensity, and suboptimal policy making, although population growth and poor input substitution are not necessarily precarious for future development.