Pollution, public debt, and growth: the question of sustainability

Abstract This paper examines an endogenous growth model that allows us to consider the dynamics and sustainability of debt, pollution, and growth. Debt evolves according to the financing adaptation and mitigation efforts and to the damages caused by pollution. Three types of features are important for our analysis: the technology through the negative effect of pollution on TFP; the fiscal policy; the initial level of pollution and debt with respect to capital. Indeed, if the initial level of pollution is too high, the economy is relegated to an endogenous tipping zone where pollution perpetually increases relatively to capital. If the effect of pollution on TFP is too strong, the economy cannot converge to a stable and sustainable long-run balanced growth path. If the income tax rates are high enough, we can converge to a stable balanced growth path with low pollution and high debt relative to capital. This sustainable equilibrium can even be characterized by higher growth and welfare. This last result underlines the role that tax policy can play in reconciling debt and environmental sustainability.