Climate action in an endogenous growth model with social capital and wealth taxation

Climate action involves strategies to reduce emissions, strengthen resilience, and promote sustainable practices. Yet its effectiveness depends not only on fiscal instruments but also on social and institutional factors. This paper develops a multi-sector endogenous growth model to examine how social capital and wealth taxation jointly shape the path toward sustainability. The results indicate that social capital amplifies the effectiveness of public spending and reduces the fiscal cost of environmental sustainability. By contrast, when social capital growth is weak, even high levels of wealth taxation may fail to secure environmental sustainability. The paper shows that wealth tax-financed climate action can be growth-compatible, only in the presence of sufficiently strong social capital growth. Strengthening social capital therefore emerge as a central condition for reconciling environmental and economic objectives in the long run. Additionally, the model introduces a novel valuation framework by embedding a permanent wealth tax into the no-arbitrage condition, indicating a Pigouvian-like effect on the economy. However, the quantitative impact of this channel depends on the effectiveness of public spending, which is in turn shaped by the social capital dynamics.