Conservation Capital and Sustainable Economic Growth
PERE Working Paper #6
Posted: 8 Dec 1997
Date Written: July 1997
The key question addressed in this paper is: Does preservation of environmental quality inevitably conflict with economic growth? Concern for environmental protection in the dynamic context in the endogenous growth and environment literature has manifested itself almost exclusively in models which link the discharges of pollutants to the level of consumption or production activities and focus on abatement of pollution at the end-of-the-pipe. In contrast, this paper links pollution to the ineffective use of inputs in the process of production. It develops a macro-economic model in which pollution can be prevented at source by increasing the effectiveness with which inputs are applied in production thereby reducing input waste and pollution. The paper distinguishes between conservation capital, which is input productivity increasing and pollution reducing, and production capital which does not affect the pollution intensity of inputs. It demonstrates conditions under which individual preferences for environmental quality and private gains in input-productivity through investment in conservation capital can lead to rates of investment in conservation capital that reduce pollution to a sustainable level, even in the absence of environmental regulations. However, when these conditions are not met, environmental policy in the form of an emissions-tax is required to maintain environmental quality constant. The paper demonstrates that environmental policy may lead to a sustainable balanced growth rate higher than the rate of growth in an unregulated economy, if the weight attached to environmental quality in individual preferences is high, the rate of time preference is low and output-elasticity of conservation capital is high. These conditions mitigate the intensity of the crowding-out effect of investment in conservation capital on growth rates by increasing the willingness of society to sacrifice present consumption and by increasing the productivity-effect of investment in conservation capital.
JEL Classification: Q2, O3, O4
Suggested Citation: Suggested Citation