Is the environment compatible with growth? Adopting an integrated framework

Abstract

The paper develops an integrated baseline model to assess the trade-offs between the natural environment and economic growth. Consumption growth is considered under welfare and sustainability aspects. The framework features capital accumulation and the sectoral structure of the economy as key elements to cope with resource scarcity and pollution. Model extensions varying the number of sectors and inputs, changing central functional forms, and introducing poor input substitution and population growth are presented. The setup highlights the dual role of used inputs as a source of environmental problems and apart of the solution; it also discusses uncertainty and momentum effects. The paper concludes that the environment and economic growth can be compatible but that small deviations from the optimal paths my entail unsustainable development. Critical issues for sustainability are insufficient foresight, increasing damage intensity, and suboptimal policy making while population growth and poor input substitution are not necessarily precarious for future development.