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Baumol’s Climate Disease

Author

Listed:
  • Fangzhi Wanga

    (School of Management and Economics, Beijing Institute of Technology, Beijing, 100081; China Center for Energy and Environmental Policy Research; Beijing Institute of Technology, Beijing, 100081, China:)

  • Hua Liao

    (School of Management and Economics, Beijing Institute of Technology, Beijing, 100081; China Center for Energy and Environmental Policy Research; Beijing Institute of Technology, Beijing, 100081, China:)

  • Richard S.J. Tol

    (Department of Economics, University of Sussex, B91 NSL Falmer, United Kingdom)

Abstract

We investigate optimal carbon abatement in a dynamic general equilibrium climate-economy model with endogenous structural change. By differentiating the production of investment from consumption, we show that social cost of carbon can be conceived as a reduction in physical capital. In addition, we distinguish two final sectors in terms of productivity growth and climate vulnerability. We theoretically show that heterogeneous climate vulnerability results in a climate-induced version of Baumol’s cost disease. Further, if climate-vulnerable sectors have high (low) productivity growth, climate impact can either ameliorate (aggravate) the Baumol’s cost disease, call for less (more) stringent climate policy. We conclude that carbon abatement should not only factor in unpriced climate capital, but also be tailored to Baumol’s cost and climate diseases.

Suggested Citation

  • Fangzhi Wanga & Hua Liao & Richard S.J. Tol, 2023. "Baumol’s Climate Disease," Working Paper Series 0723, Department of Economics, University of Sussex Business School.
    • Handle: RePEc:sus:susewp:0723
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    Keywords

    Structural change; Climate capital; Integrated assessment model; Social cost of carbon; Baumol’s cost disease;
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