Directed Technical Change and Economic Growth Effects of Environmental Policy

37 Pages Posted: 16 Jun 2016

See all articles by Peter Kruse-Andersen

Peter Kruse-Andersen

University of Copenhagen - Department of Economics

Date Written: June 15, 2016


A Schumpeterian growth model is developed to investigate how environmental policy affects economic growth when environmental policy also affects the direction of technical change. In contrast to previous models, production and pollution abatement technologies are embodied in separate intermediate good types. A set of stylized facts related to pollution emission, environmental policy, and pollution abatement expenditures is presented, and it is shown that the developed model is consistent with these stylized facts. It is shown analytically that a tightening of the environmental policy unambiguously directs research efforts toward pollution abatement technologies and away from production technologies. This directed technical change reduces economic growth and pollution emission growth. Simulation results indicate that even large environmental policy reforms have small economic growth effects. However, these economic growth effects have relatively large welfare effects which suggest that static models and exogenus growth models leave out an important welfare effect of environmental policy.

Keywords: Directed technical change, endogenous growth, pollution, environmental policy, Schumpeterian growth model

JEL Classification: O30, O41, O44, Q55, Q58

Suggested Citation

Kruse-Andersen, Peter, Directed Technical Change and Economic Growth Effects of Environmental Policy (June 15, 2016). Univ. of Copenhagen Dept. of Economics Discussion Paper No. 16-06, Available at SSRN: or

Peter Kruse-Andersen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.

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