Endogenous Technology and Climate Change

Abstract

This paper studies the implications of the event of climate change for an economy that is characterized by an endogenous growth framework. The technological change is driven by the accumulation of knowledge that increases the efficiency of a renewable energy sector, leading to a reduction of the alternate fossil fuel energy use. A decentralized equilibrium is defined, and by comparing with the social planner solution an optimal carbon tax is obtained. This environmental policy accounts for the externality imposed by a rising temperature that is the result of the generation of pollution from the fossil fuel consumption, and that damages the output of the overall economy.