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Environmental Investment and Policy with Distortionary Taxes and Endogenous Growth

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Author Info
Don Fullerton
Seung-Rae Kim

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Abstract

Recent studies consider public R&D spending that affects abatement knowledge and endogenous growth, distortionary taxes that affect physical and human capital formation, pollution taxes that affect environmental degradation, and regeneration that restores natural capital. Our model combines all of those elements. We show how the combination affects results from each prior model, focusing on two parameters that represent the need for distorting taxes, and the productivity of abatement knowledge relative to pollution. First, either of these two extensions can reverse the prior finding that pollution tax revenue is more than enough to pay for public abatement R&D. Second, tax distortions and externalities substantially alter prior findings that the ratio of public to private capital is based only on output elasticities. Third, our dynamic model affects prior static findings about how other public spending "crowds out" provision of the environmental public good. Fourth, we show whether a greater need for public spending leads to greater increases in the distorting tax or pollution tax. Fifth, while prior research is optimistic that environmental regulation can boost economic growth, we show how it may increase or decrease the growth rate --even if it raises welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12070.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12070

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Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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  5. Xepapadeas, Anastasios, 1997. "Economic development and environmental pollution: traps and growth," Structural Change and Economic Dynamics, Elsevier, vol. 8(3), pages 327-350, August. [Downloadable!] (restricted)
  6. Bovenberg, A.L. & Smulders, S., 1993. "Environmental Quality and Pollution-Saving Technological Change in Two- Sector Endogenous Growth Model," Papers 9321, Tilburg - Center for Economic Research.
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  10. Raymond Gradus & Sjak Smulders, 1993. "The trade-off between environmental care and long-term growth—Pollution in three prototype growth models," Journal of Economics, Springer, vol. 58(1), pages 25-51, February. [Downloadable!] (restricted)
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  18. Glomm, Gerhard & Ravikumar, B., 1999. "Competitive equilibrium and public investment plans1," Journal of Economic Dynamics and Control, Elsevier, vol. 23(8), pages 1207-1224, August. [Downloadable!] (restricted)
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  22. Tahvonen, Olli & Kuuluvainen, Jari, 1991. "Optimal growth with renewable resources and pollution," European Economic Review, Elsevier, vol. 35(2-3), pages 650-661, April. [Downloadable!] (restricted)
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