Environmental Policy and Growthwhen Environmental Awarenessis Endogenous

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