Abstract:-
A global shift towards designing net-zero carbon policy for sustainable growth is emerging. Using the lens of an endogenous growth model, this paper explores three key aspects of such policy (i) growth with a renewable biased technology, (ii) public investment in renewable resources, and (iii) a carbon tax to promote the use of renewables. In our model, the final output is produced with two inputs, renewable and nonrenewable capital. Use of nonrenewable capital causes depreciation of renewables via emissions and externalities that pose a deadweight loss by depressing growth. The carbon tax encourages substitution of nonrenewable capital with renewable capital towards a net-zero carbon target. We show that (i) the carbon tax will need to be higher if the technology allows less substitution of renewable with nonrenewable capital, (ii) renewable economies enjoy higher growth and less need for carbon taxation, and (iii) greater efficiency in emissions abatement promotes long run growth by reducing the deadweight loss.
(Joint with Tooraj Jamasb)