Pollution Permits and Sustainable Growth in a Schumpeterian Model

In Chapter 4 of their book (“Endogenous Growth Theory,” MIT Press, Cambridge, MA (1998)), Aghion and Howitt introduce environmental pollution in an aggregate Schumpeterian model and characterize the optimal path. In this paper, we study the equilibria in a decentralized economy compatible with their model. First, we study the trade-off between environmental quality and growth and identify the channels of transmission of environmental policy into growth performance. Then, we compute the levels of the tools which are used to implement the optimum.