Pollution-augmenting innovation and sustainable growth

This paper studies the long-run environmental consequences of pollution-augmenting technological change in a two-sector dynamic general equilibrium model. Technological progress is defined as pollution-augmenting when it raises the productivity of pollution-intensive inputs, and innovations are classified as disruptive or non-disruptive according to their effects on the relative price of the dirty final good. Decomposing emissions growth into scale, output-composition, and technique effects, the paper characterizes the conditions under which a pollution tax stabilizes emissions over time. The analysis highlights the central role of the elasticity of intertemporal substitution and substitution elasticities in production and consumption. When technological change is disruptive and the elasticity of intertemporal substitution exceeds one, macroeconomic rebound effects may dominate efficiency gains, rendering sustainable growth infeasible unless sufficient complementarity holds across the two final consumption goods or production inputs. Targeted subsidies for clean technology can expand the range of parameters consistent with sustainable growth by shifting the disruptiveness threshold, provided that production inputs are sufficiently substitutable.