Global warming in a basic endogenous growth model∗

This paper studies the interrelation between anthropogenic global warming and economic growth. It is assumed that deviations from the pre-industrial average global surface temperature negatively affect aggregate output and utility. The government levies a tax on output and a tax on greenhouse gases. Assuming a basic endogenous growth model the effects of varying the tax rates are analyzed as concerns economic growth, economic welfare and as concerns the rise in average global surface temperature. Using simulations, it is demonstrated that higher emission taxes may both raise economic growth and welfare while reducing the extent of global warming. In addition, situations exist where a rise in emission taxes reduces economic growth but raises welfare. Further, in the social optimum economies with cleaner technologies have fewer emissions than economies with less clean production technologies.