Environmental investment and policy with distortionary taxes, and endogenous growth

Recent studies consider public R&D spending that affects abatement knowledge and endogenous growth, distortionary taxes that affect capital formation, pollution taxes that affect environmental degradation, and regeneration that restores natural capital. Our model combines all those elements. The combination affects prior results, focusing on two parameters: the need for distorting taxes, and productivity of abatement knowledge relative to pollution. First, these two extensions can reverse prior findings that pollution tax revenue is always enough to pay for public R&D. Second, tax distortions and externalities alter prior findings that the ratio of public to private capital depends only on output elasticities. Third, dynamics affect prior static findings about other public spending “crowding out” environmental public goods. Fourth, a greater need for public spending can lead to greater increases in distorting taxes or pollution taxes. Fifth, greater environmental regulation can mean growth is higher or lower, even if welfare is higher.