DP17368 Greenhouse Gas Mitigation and Price-driven Growth in a Baumol-Solow-Swan Economy

Author(s): Michael C Burda, Leopold Zessner-Spitzenberg
Publication Date: June 2022
Keyword(s): anthropogenic climate change, Baumol model, mitigation, price-driven economic growth, Solow-Swan growth model
JEL(s): O44, Q01, Q54
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17368

The existence of an environmental limit changes fundamentally the nature of economic growth. When atmospheric greenhouse gases reach a predetermined absolute threshold, further growth requires a permanently expanding, resource-intensive mitigation effort. We incorporate anthropogenic climate change and its mitigation into the Solow-Swan growth model and show that if the rate of technical progress in mitigation fails to exceed a critical value, the economy behaves as described by Baumol (1967). Economic growth in this regime is then driven by technological progress in mitigation and the dynamics of its relative price. Even in the extreme case that long-run growth of produced output converges to zero, the growth rate of GDP measured in terms of produced goods does not.