Polluting Non-Renewable Resources, Carbon Abatement and Climate Policy in a Romer Growth Model

We study how the availability of an abatement technology affects the optimal use of polluting exhaustible resources, and optimal climate policies. We develop a Romer endogenous growth model in which the accumulated stock of greenhouse gas emissions harms social welfare. Since the abatement technology allows reducing the effective pollution for each unit of resource use, extraction and pollution are partially disconnected. Abatement accelerates the optimal extraction pace, though it may foster CO2 emissions for the early generations. Moreover, it is detrimental to output growth. Next, we study the implementation of a unit tax on carbon emissions. Contrary to previous results of the literature, its level here matters, as it provides the right incentives to abatement effort. When it is measured internal good, the optimal (Pigovian) carbon tax is increasing over time, while it is constant when expressed in utility. Moreover, it can be interpreted ex-post as a decreasing ad-valorem tax on the resource. Finally, we study the impact of the climate policy on the decentralized equilibrium: in particular, it fosters both the intensity and the rate of carbon abatement. In the near-term, it spurs research and output growth, while decreasing output level.

Carbon Sequestration, Economic Policies and Growth

The possibility of capturing and sequestering some fraction of the CO2 emissions arising from fossil fuel combustion, often labeled as carbon capture and storage (CCS), is drawing an increasing amount of attention in the business and academic communities. We present here a model of endogenous growth in which the use of a non-renewable resource in production yields flows of pollution whose accumulated stock negatively affects welfare. A CCS technology allows, via some effort, for the partial reduction of CO2 emissions in the atmosphere. We characterize the social optimum and how the availability of the CCS technology affects it, and we study the decentralized economy's trajectories. We then analyze economic policies. We first characterize the first-best policy. We derive the expression of the Pigovian carbon tax, and we give a full interpretation of its level, which is unique. We then study the impacts of three different second-best policies: a carbon tax, a subsidy to sequestered carbon, and a subsidy to labor in CCS. The first two tools foster CCS activity; so does the third, but only if it is coupled with one of the other two. While the tax postpones resource extraction, the two subsidies accelerate it's possibly yielding a rise in short-term CO2 emissions. The effects on growth are more complex. If the weight of the CCS sector in the economy is high, the tax will generally be detrimental to output growth, while the subsidies can foster it in the long-term. Finally, the carbon tax has a negative impact on the output level in the short-term, contrary to the subsidies