Simulating sustainable futures - Investigating the implications of CO2 emission caps on economic growth in the OECD

Abstract: The matters of economic growth and climate change are both widely subjected to discussions and policymakers are under immense pressure to make decisions that enhance economic growth and stop climate change. Policies that ensure economic growth have traditionally had a negative impact on climate change and vice versa. It is therefore important to study how various policies can address the connection between the two. This paper analyses the potential effectiveness of implementing absolute caps on carbon emitting capital stock and investments in environmentally friendly technology as policy strategies to combat climate change and its implications on economic growth within the OECD. The analysis is based on a model for economic growth that considers technology to be endogenous. It is conducted through simulations in order to observe the trajectory of GDP per capita as well as accumulated pollution, which is then compared to set carbon budgets. The results show that technological advancements are crucial in order to sustain long-term economic growth. It also shows an initial period of degrowth is likely to happen. The study emphasises the welfare gains that are acquired through sustainability that could compensate for the initial losses in material well being. Further, the results show that a complete reduction in environmentally harmful capital stock is necessary. By investigating these policies, this paper contributes with useful insights in the duality that is economic growth and climate change.