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Baumol’s climate disease

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  • Wang, Fangzhi
  • Liao, Hua
  • Tol, Richard S.J.

Abstract

We investigate optimal carbon abatement in a dynamic general equilibrium climate-economy model with endogenous structural change. By differentiating the production of investment from consumption, we show that social cost of carbon can be conceived as a reduction in physical capital. In addition, we distinguish two final sectors in terms of productivity growth and climate vulnerability. We theoretically show that heterogeneous climate vulnerability results in a climate-induced version of Baumol’s cost disease. Further, if climate-vulnerable sectors have high (low) productivity growth, climate impact can ameliorate (aggravate) the Baumol’s cost disease, call for less (more) stringent climate policy. We conclude that carbon abatement should not only factor in unpriced climate capital, but also be tailored to Baumol’s cost and climate diseases.

Suggested Citation

  • Wang, Fangzhi & Liao, Hua & Tol, Richard S.J., 2025. "Baumol’s climate disease," European Economic Review, Elsevier, vol. 180(C).
    • Handle: RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002259
    DOI: 10.1016/j.euroecorev.2025.105175
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    JEL classification:

    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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