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Education Quality, Green Technology, and the Economic Impact of Carbon Pricing

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  • Macdonald, Kevin

    (World Bank)

  • Patrinos, Harry A.

    (World Bank)

Abstract

Carbon pricing is increasingly used by governments to reduce emissions. The effect of carbon pricing on economic outcomes as well as mitigating factors has been studied extensively since the early 1990s. One mitigating factor that has received less attention is education quality. If technological change that reduces the reliance of production on emissions is skill-biased, then carbon pricing may increase the skill premium of earnings and subsequent wage inequality; however, a more elastic skill supply through better education quality may mitigate adverse economic outcomes, including wage inequality, and enhance the effect of carbon pricing on technological change and subsequently emissions. A general equilibrium, overlapping-generations model is proposed, with endogenous skill investment in which the average skill level of the workforce can affect the need for emissions in an aggregate production function. This study uses data on industrial emissions linked to the Organisation for Economic Co-operation and Development's Programme for International Assessment of Adult Competencies dataset for European Union countries. The findings show that, within countries, cognitive skills are positively associated with employment in industries that rely less on emissions for production and in industries that, over time, have been able to reduce their reliance on emissions for production. In the estimated general equilibrium model, higher cognitive skills reduce an economy's reliance on emissions for production. Having higher quality education—defined as the level of cognitive skills attained by workers per unit of cost—increases the elasticity of skill supply and, as a result, mitigates a carbon tax's economic costs including output loss and wage inequity, and enhances its effect on emissions reduction. The implication is that investments in education quality are needed for better enabling green technological innovation and adaptation and reducing inequality that results from carbon pricing.

Suggested Citation

  • Macdonald, Kevin & Patrinos, Harry A., 2021. "Education Quality, Green Technology, and the Economic Impact of Carbon Pricing," IZA Discussion Papers 14792, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14792
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    More about this item

    Keywords

    carbon pricing; education; skills; learning outcomes;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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