A New Growth Path for Europe

In the past decades, a canonical type of economic growth models has emerged. It is often dubbed the neoclassical growth model, and it provides the backbone of much research in climate economics. An excellent presentation is given by Barro and Sala-i-Martin (2003), the best application in climate economics is due to Nordhaus (2008). This model type has its problems, and there are strong reasons to look for models of a different kind, especially in light of the recent financial crisis (Farmer and Foley 2009). However, existing models embody considerable empirical knowledge about past patterns of economic growth and provide a common language currently used by most analysts and policy makers. Therefore, we take the neoclassical growth model as our starting point. The starting point, however, is what we will leave behind step by step. Neoclassical models express the familiar view of a market economy as organized by an ’invisible hand’ in such a way as to achieve a unique equilibrium. In growth theory, this is a unique growth path. In climate economics, this path is then seen as causing massive damages in the future because of greenhouse gases emitted now. In order to avoid these damages, present emissions must be reduced, leading to lower GDP now. The problem of climate policy then is to find some mechanism of sharing that burden among the various relevant actors. More climate protection then means lower growth: the idea of green growth as a way to protect the environment while enhancing economic growth would be an illusion. We start by rehearsing a model of this type. Then we introduce three modifications that lead to the possibility of green growth.