Environmental Regulations, Abatement and Economic Growth

Due to recent global discussions about climate change and its possible consequences, the implementation of environmental policy instruments with the intent to counteract the current environmental developments has become increasingly important. Environmental regulation as policy instrument is supposed to reduce or ideally minimize emissions and pollution. However, the question arises how effective such regulations are. Further on, it is not obvious whether these policy instruments rather repress innovation and economic growth than induce a shift toward a greener technology. To address these questions we investigate an endogenous growth model in an environmental context, introduced by M. Rauscher (Green R&D versus end-of-pipe emission abatement: a model of directed technical change (Thuenen-Series of Applied Economic Theory, Working Paper 106), 2009). Rauscher investigates the impact of environmental standards on capital accumulation and R&D investments in an economy where both, brown (dirty) as well as green (clean) capital can be used in production. While Rauscher keeps the problem formulation rather general without assuming specific model functions, our focus is to apply optimal control theory to a specific scenario of this model.