Pollution, Endogenous Capital Depreciation, and Growth Dynamics

This paper documents a positive and significant relationship between carbon dioxide emissions and capital depreciation rate for a large sample covering more than 80 countries in recent decades. Using this result, we develop a simple Solow model with an AK production function in which a pollution externality, viewed as a stock, increases the capital depreciation rate. In the long run, it appears that whatever the magnitude of the pollution effect on capital depreciation, there is no room for endogenous growth despite the AK technology. Moreover, we observe that a sufficiently sensitive capital depreciation rate to pollution can lead to the emergence of a limit cycle near the steady state (i.e., a Hopf bifurcation), indicating that the relationship empirically documented within this paper acts as a destabilizing force for the economy.