Non-renewable Resources, Endogenous Growth, and Environmental Policy

Abstract

I investigate the impact of pollution generated from the utilization of exhaustible resources in the endogenous growth model. The endogenous model is an appropriate treatment of technological change in analyzing a long-term growth with a constraint of polluting non-renewable resources. Under this model, I consider the relationship between environmental policies and technological change. The environmental policies are found to induce technological change which can avoid the depletion of exhaustible resources and the deterioration of the environment. I extensively discuss two approaches focusing on endogenous technological change.

Although both approaches are formulated with the constraint of resources and focus on the negative externality, they lead to strikingly different results. An approach by Schou [2000] concludes that an environmental policy is unnecessary since the market behaves optimally. The other approach by Grimaud and Rouge [2005] concludes that the market shows a distortion at the equilibrium and an environmental policy instrument be introduced to correct it. In this approach, it is shown that the growth rate of tax impacts price, quantities, and growth rates.

Finally, I examine the current state of environmental policies that aim to mitigate, and adapt to, climate change, by presenting examples of environmental policy tools.