Balancing Growth and Environmental Damages: A Ramsey-Based Approach

This thesis investigates the dynamic interaction between economic growth and environmental degradation by developing an intertemporal Ramsey growth model extended to include pollution accumulation and environmental disutility. Formulated in continuous and discrete time and solved numerically in Dynare under perfect foresight, the model examines how an exogenous reduction in emissions intensity facilitates the transition from a high-emissions steady state to a new low-emissions steady state. Calibrated to reflect a target total-emissions reduction, the numerical experiments evaluate two adjustment scenarios: a fast 30-year transition and a slow 50-year transition. The results demonstrate that lower emissions intensity reduces the future environmental penalty on capital accumulation, incentivizing the social planner to temporarily lower short-run consumption to finance higher investment. In the long run, this transition yields higher capital stock, output, and consumption alongside reduced pollution. Comparing the transition speeds reveals that while both scenarios converge to the same long-run equilibrium, a faster transition requires a sharper short-run consumption sacrifice but limits the cumulative accumulation of the pollution stock. Finally, the thesis highlights the key limitation of assuming costless exogenous technology improvements and outlines potential model extensions incorporating explicit abatement expenditures.