Sustainable Economic Growth: The Ominous Potency of Structural Change

This paper examines the pattern of sustainable economic growth in both open and closed economies in the presence of an optimal pollution emission tax. This paper shows that in a small open economy, the optimal pollution tax remains constant even in a growing economy as the domestic production of dirty output is replaced by an ever growing volume of imports. The total amount of pollution decreases due only to structural change or output composition effect. The structural change effect reduces incentives to develop and adopt environmentally-saving technology. In a closed economy, however, the optimal pollution tax increases over time triggering relative price changes and inducing a powerful technique effect to substitute dirty production technology with clean technology. Sustainable growth is possible if the consumption elasticity of substitution is sufficiently large to induce an output composition effect that will offset the scale in a growing economy.