Environmental Policy and Growth when Environmental Awareness is Endogenous

This paper examines the relationship between environmental policy and growth when green preferences are endogenously determined by education and pollution. We consider an environmental policy in which the government implements a tax on pollution and recycles the revenue to fund pollution abatement activities and/or an education subsidy (influencing green behaviors). When the sensitivity of agents' environmental preferences to pollution and human capital is high, the economy can converge to a balanced growth path equilibrium with damped oscillations. We show that this environmental policy can both remove the oscillations, associated with intergenerational inequalities, and enhance the long-term growth rate. However, this solution requires that the revenue from the tax rate must be allocated to education and direct environmental protection simultaneously. We demonstrate that this type of mixed-instrument environment policy is an effective way to address environmental and economic issues in both the short and the long run.