Can growth take place while reducing emissions?

Abstract

Do the effect of a carbon tax differs between countries, according to the energy mix of clean and polluting inputs? I answer this question with a theoretical model of directed technical change and test empirically the main results. I find four main outcomes: (i) In the absence of subsidies, carbon taxes have a negative effect on economic growth, (ii) this negative effect is a decreasing function of the proportion of clean energy sources in the energy mix. (iii) subsidies for clean inputs have a positive effect on economic growth, and (iv) the magnitude of this effect grows with the proportion of clean energy sources. The empirical results are consistent with the predictions of the theoretical model and suggest that policymakers could consider this relationship between the energy mix and the economic effect of a carbon tax when creating environmental regulations.