Abatement Technology and the Environment–Growth Nexus with Education

The present paper adopts a Yaari (Rev Econ Stud 32:137–150, 1965 ) and Blanchard (J Polit Econ 93(2):223–247, 1985 ) overlapping generations model with Lucas’s (J Monet Econ 22(1):3–42, 1988 ) human capital accumulation in order to examine how environmental taxation influences growth. It challenges conventional result that tighter environmental tax has either no long term effect at all, or has a positive long term effect. In the case of Cobb–Douglas production functions and logarithmic utilities, this paper demonstrates that the technology used in the abatement sector determines the existence and direction of the growth effect. In the case of output taxation, if the abatement sector is relatively more (respectively less) intensive in human capital than the final output sector, tighter environmental tax increases (resp. reduces) growth in the long term. This result always holds true for finite life expectancy but for infinite life expectancy it only holds true when the labour supply is endogenous. The transitional impact of tighter environmental policy is also investigated. We find that the magnitude of the short term effects of environmental taxation varies according to the technology used in the abatement and final output sectors, and that there is a reverse trade-off between the short and the long term effects. Copyright Springer Science+Business Media Dordrecht 2015