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The capital tax paradox in a greening economy

Author

Listed:
  • Kirill Borissov

    (Institute for Regional Economic Studies (Russian Academy of Sciences), European University St. Petersburg)

  • Lucas Bretschger

    (CER-ETH Center of Economic Research at ETH Zurich)

  • Aleksey Minabutdinov

    (CER-ETH Center of Economic Research at ETH Zurich)

Abstract

We adopt a simple model of endogenous growth with polluting capital and a fixed budget for aggregate emissions. Pollution abatement efficiency is growing over time due to technical progress. We find that long-run capital and consumption are inversely related to the initial capital stock. Capital taxation does not harm the economy but actually raises long-run consumption and production, which we call the “capital tax paradox.” The reason for this surprising result is that in an economy with a binding carbon policy, early abundance of polluting capital is not a blessing but a curse. It is preferable to have a large capital stock when abatement efficiency has grown sufficiently large. The paper also provides novel results on the impact of pollution intensity and the rate of technical progress on the greening of the economy and the pollution permit prices. In the quantitative part, we calibrate model and study economic growth under different assumptions on the basic model parameters.

Suggested Citation

  • Kirill Borissov & Lucas Bretschger & Aleksey Minabutdinov, 2022. "The capital tax paradox in a greening economy," International Economics and Economic Policy, Springer, vol. 19(2), pages 315-329, May.
    • Handle: RePEc:kap:iecepo:v:19:y:2022:i:2:d:10.1007_s10368-022-00536-7
    DOI: 10.1007/s10368-022-00536-7
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    References listed on IDEAS

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    4. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
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    7. Groth, Christian & Schou, Poul, 2007. "Growth and non-renewable resources: The different roles of capital and resource taxes," Journal of Environmental Economics and Management, Elsevier, vol. 53(1), pages 80-98, January.
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