The Green Solow Model - A Lecture Course Presentation

A presentation within the lecture course
Growth Theory
in summer term 2011

The Green Solow Model
investigating sustainable economic growth
by W. A. Brock and M. S. Taylor
05.05.2011
Florian Hage| Eberhard-Karls-Universitt Tbingen | SQ-Seminar in Growth Theory Summerterm 2011
von 36
Over the last decades the emission of pollutants as a result of economic
activities has become an increasingly important field of research
It has been hypothesised that a relationship holds for many forms of
environmental degradation which is called Environmental Kuznets Curve
(EKC)
1

If EKC exists, economic growth might be a mean to environmental
improvement, i.e. as countries develop economically, moving from lower
to higher levels of income per capita, over all levels of environmental
degradation such as pollution will eventually fall
2
Empirical examination of cross-country data has displayed a relationship
between one economys emission levels and income per capita

Motivation
2
Motivation and empirics
Agenda
05.05.2011
Overview
Comparative steady state analysis
Conclusion and critiques
1
Kuznets, S. (1955), pp. 1-28
2
Perman, R. et. al (2003), pp. 36 f.
von 36
Emissions and GDP per capita by year
3 05.05.2011
Figure 1 from Florian Hage, data from various sources one can find in the appendix
Overview
Agenda
Take the early to mid
1970s as the start of
serious pollution
regulation
0
100
200
300
400
500
600
0
50
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1950 1975 2000
G
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e
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Time
Germany
Pollutant Emissions and GDP
Sulfur Emissions / pc (kg)
CO2 Emissions / pc (t)
GDP/pc
von 36
Take the early to mid
1970s as the start of
serious pollution
regulation
4 05.05.2011
Overview
Agenda
0
100
200
300
0
50
100
150
1950 1975 2000
G
D
P

P
e
r

C
a
p
i
t
a

i
n

L
e
v
e
l
s

N
o
r
m
a
l
i
s
e
d

b
y

1
9
5
0

T
o
t
a
l

E
m
i
s
s
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o
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s

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n

L
e
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s

N
o
r
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a
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b
y

1
9
5
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Time
United States
Pollutant Emissions and GDP
GDP/pc
Emissions and GDP per capita by year
von 36
Structure of the Green Solow Model
Setting up the model
3
The balanced growth path
The EKC
Appendix
A contemporary EKC for Germany (1950 2006)
: speed of adjustment
Additional comparative steady state analysis
Literature

Agenda
5 05.05.2011
Overview
Agenda
3
Brock, W. A.; Taylor, M. S. (2010)
von 36
The Green Solow Model combines the core model of modern growth
theory, the SOLOW-SWAN Model
4
, and one key finding in environmental
economics, the EKC
How are inputs related to the output and what is itself used for ?
General structure of the Green Solow Model
6
B
L
K
E
Y C
I = S
A
05.05.2011
General Structure
The EKC
Overview
4
Barrow, R.; Sala-i-Martin, X. (2004), p. 23 f.

von 36
The production function is of type COBB-DOUGLAS and given by

Capital accumulates via investments and depreciates at rate

Additional exogeneous parameters such as population growth, labour
augmenting technologies (e.g. computers etc.), emission growth and
pollution intensity with its technological progress in abatement (e.g.
advanced filter systems, renewables etc.), are represented by
7
( ) ( )
o o
= =
1
, BL K BL K F Y
K sY K S K I K o o o = = =
B g B
nL L
B
=
=
O = O
=
A
E
g
E g E
05.05.2011
1 0 < <o
General Structure
The EKC
Overview
von 36
Every unit of economic activity generates units of pollution, whereby
actual emission E equals pollution created minus pollution abated

A denotes the abatement level as a function of economic activity Y and
the economys efforts at abatement Y
A
.

where = Y
A
/Y denotes the proportion of economic activity at
abatement
8
( )
( )
( ) | |
( ) u O =
O =
O O =
O O =
1
/ , 1 1
/ , 1
,
Y
Y Y A Y
Y Y AY Y
Y Y A Y E
A
A
A
A Y E O O =
05.05.2011
Overview
General Structure
The EKC
von 36
In order to control for the effective population size from now on small
letters denote per capita units, i.e.

where y = (1 ) f (k) represents that income per capita which is not
used up for abatement

Since capital per capita as a pure input factor evolves over time by

the amount of capital per capita accumulates over time
9
k sk k o
o
=
( ) ( ) ( ) ( ) ( )
BL K k
k k f BL K F y
/
1 1 1 , / 1
=
= = =
o
u u u
( ) ( )k n g k s k
BL
K
B
o u
o
+ + = =
|
.
|
\
|
-
1
~
05.05.2011
Overview
General Structure
The EKC
von 36
10
Ein Spiel wird als supermodular bezeichnet, wenn die eigene
Grenzgewinnfunktion eines Spielers (eigene Gewinnfunktion nach der
eigenen Strategievariablen differenziert) durch eine Erhhung der
strategischen Variablen jedes anderen Spielers erhht wird.
Approaching the balanced growth path gives the steady state
05.05.2011
Necessary conditions:

Steady state

Inada conditions hold for Y = F(K,BL)
, otherwise the accumulation process does not
start
( ) ( ) 0 1
~
= + + = k n g k s k
B
o u
o
gross savings
function per capita
capital diminishing
function per capita
( ) 0 0 > k
Overview
General Structure
The EKC
von 36
We then find the steady state capital per capita

The corresponding income per capita

On the balanced growth path aggregate GDP, consumption and capital
all grow at rate

But the objective of the Green Solow Model is to relate income levels
to environmental quality
05.05.2011 11 Florian Hage| Eberhard-Karls-Universitt Tbingen | SQ-Seminar in Growth Theory Summerterm 2011
( )
o
o
u

-
+ +
=
1
1
1
n g
s
k
B
( )
( )
o
o
o
o
u

- -
+ +
= =
1
1
n g
s
k y
B
n g g g g
B K C Y
+ = = =
Overview
General Structure
The EKC
von 36
Derivation of the growth rate of emissions
where
Taking logs and differentiating with respect to time yields
5
in steady state

Sustainable growth in steady state is realised if
( ) u O = 1 Y E
o
k BL BL K F Y = = ) , (
0
~
< = + + =
+ + +
O
O
=
E B A
g n g g
k
k
L
L
B
B
E
E

o 0
~
= k
A B
g n g < +
What does sustainability mean here ?
We define sustainable growth as a balanced growth
path generating both rising income per capita and an
improving environment due to decreasing growth rates
in aggregate emissions E.
Overview
General Structure
The EKC
5
Ferrara, M.; Guerrini, L. (2009), p. 48.
von 36
How do we derive an EKC ?
We write aggregate emissions at any time t by

Differentiate with respect to time yields
The EKC
t g
E
e t k L B t E
o
u ) ( ) 1 ( ) (
0 0 0
O =
initial conditions
Percentage rate of change of emissions
with
) ( ) 1 (
~
1
o o u o o
o
+ + + = + =

n g k s g
k
k
g
E
E
B E E
k k y y

~
=o
Overview
General Structure
The EKC
von 36
The EKC sustainable growth
14
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
T
B
) (T k
-
k
) (T k
BL K k / =
BL K k / =
05.05.2011
Level of
emissions
E
E
g
E
< 0
k(0) < k(T ) < k
*
growth rate of aggregate
emissions /E is at first
positive but turns
negative in finite time

k(T ) < k(0) < k
*

growth rate of aggregate
emissions /E is
negative for all times t;
same along the balanced
growth path
-
k
Overview
General Structure
The EKC
von 36
The EKC unsustainable growth
15
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
T
B
) (T k
-
k
) (T k
BL K k / =
BL K k / =
05.05.2011
Level of
emissions
E
E
g
E
> 0
k(0) < k
*
< k(T )
Although /E declines
over time t, growth rate
of aggregate emissions
remains positive when k
approaches the steady
state k
*
and keeps on
growing along the
balanced growth path
-
k
Overview
General Structure
The EKC
von 36
The EKC
Intermediate critiques
So far examination of the emission profile
Just very little evidence about the actual emissions level
and its income per capita especially at k(T )
Model might cause confusion such that countries with
identical parameters (s, n, ,) show same emission
levels; that is in fact not the case
Starting conditions such as k(0), (0), B(0) and L(0)
determine the model also; consequently we cannot
conclude from emissions to income levels
Now examination of the emissions peak T

Overview
General Structure
The EKC
von 36
The amount of capital at T can be found by solving
for k which yields

How long does it take to reach peak emissions T ?
We rewrite the process of capital accumulation as a function of time:

where k(t) is an exponentially weighted average of the economys initial
capital per capita k(0) and its steady state level k
*
, the speed of adjustment
The EKC peak of aggregate emissions T
0
~
= + =
k
k
g
E
E
E
o
( )
o
o o
u

+ +

=
1
1
/
1
) (
E B
g n g
s
T k
( )
o | o |
o

+ =
1
1
) 1 (
) 1 (
) 0 ( 1 ) (
t t
e k e k t k
Overview
General Structure
The EKC
( ) 0 ) 1 ( > + + = o o | n g
B
von 36
From k(t) we obtain at t = T and then solving for T an implicit function
for the time it takes to reach the peak level of aggregate emissions:
-
) 1 (
) 1 (
) 1 (
) 1 (
) (
) 0 (
ln
1
o
o
o
o
|
T k k
k k
T
Comparative stability
Calendar time T needed to reach peak emissions
0 / < c c | T
0 ) 0 ( /
) 1 (
) 1 (
>
|
.
|
\
|
c c

- o
o
k k T
0 ) ( /
) 1 (
) 1 (
<
|
.
|
\
|
c c

- o
o
T k k T
is declining in the speed of convergence
is increasing in the gap
between k
*
and k(0)
is increasing the closer T and
B are located to each other
Overview
General Structure
The EKC
von 36
Consequently, peak emissions given by E(t) with t = T :

It is apparent from E(T ) that if we compare two economies with same
exogeneous parameters (s, g
B
, n, , , and thus same k*), these
economies will neither share the same income per capita nor the same
peak level of emissions
( )
T g T T
B
T g
E
E
e e k e
n g
s
L B
e T k L B T E
o
o
| o |
o
o
u
u
u
+
|
|
.
|
\
|
+ +
O =
O =
1
) 1 (
0 0 0
0 0 0
) 0 ( 1
) 1 (
) 1 (
) ( ) 1 ( ) (
) 1 ( o
-
k
) (T y
Overview
General Structure
The EKC
von 36
When exactly is the level of peak emissions E(T ) reached ?
Examining the growth rate of emissions again

with

here it becomes apparent that the changing rage of capital accumulation
is generating the dynamics of the Green Solow Model. The only effect of
is its impact on growth of output per capita g
y
, thus g
y,t
changes
over time. In the long run
y t y
t
g g =

,
lim
0
) (
) (
~
) (
) (
~
=
|
|
.
|
\
|
+ + + =
+ + +
O
O
=
t k
t k
n g g
t k
t k
L
L
B
B
E
E
B A

o
o
t y
g
,
0
0
,
,
>
' '
<
'
t y
t y
g
g
) ( / ) (
~
t k t k
Overview
General Structure
The EKC
von 36
21
A
g
y
g
) (
) (
~
,
t k
t k
n g g
B t y
o + + =
T
t
t
05.05.2011
growth
rates
) (t E
Mechanics
t < T :
g
y,t
> g
A
and g
E
> 0

t = T :
g
y,t
= g
A
and g
E
= 0

t > T :
g
y,t
< g
A
and g
E
< 0

which again represents
our sustainability
assumption

T
Level of
emissions
Overview
General Structure
The EKC
Figure following Stefanski, R. (2010), p. 6.
von 36
Characterisation of the EKC profile
t < T :
Rising total emissions because abatement is not enough to
outweigh extra pollution caused by faster growth of GDP
t = T :
Peak emissions are reached when the rate at which emissions
are created via output growth g
y,t
are exactly offset by the rate
at which they are abated g
A

t > T :
Falling growth of emission because improvements in emission
intensity outweigh the additional pollution created by
production

0
,
> =
E A t y
g g g
0
,
= =
E A t y
g g g
0
,
< =
E A t y
g g g
A t y
g g =
,
Overview
General Structure
The EKC
von 36
How are aggregate emissions E(t) related to output y(t) ?

Substituting into E(t) we obtain E[(y)]:

which represents a parametric relationship between aggregate
emissions and income per capita that we refer to as an EKC
The EKC relation of aggregate emissions and output
( )
) (
1
) ( ) 1 ( ) (
0 0 0
) 0 ( 1
) 1 (
) 1 ( )] ( [
y g y y
B
E
e e k e
n g
s
L B y E
o
o
o
|o o |o
o
u
u o

+
|
|
.
|
\
|
+ +
O =
) (t y y =
t
y
) ( y t o =
y
t
) ( y t o =
0 ) ( >
'
y o
Overview
General Structure
The EKC
von 36
The derivative of E[(y)] with
respect to output per capita y
yields:

which too represents the EKC we
derived previously.
The EKC relation of aggregate emissions and output
> <
= =
< >
=
'
'
=
c
c
T t for
T t for
T t for
y y E
y
y E
0
0
0
) ( )] ( [
)] ( [
o o
o
A
g
y
g
t y
g
,
y(T )
y
y
growth
rates
)] ( [ y E o
Level of
emissions
y(T )
Overview
General Structure
The EKC
von 36
25
) (T k
BL K k / =
Lower initial conditions
(0), B(0), L(0) and k(0) :

Affect E(t) and y(t) directly
But no impact on steady
state magnitudes of k* and
y* nor on long run growth
rates

05.05.2011
Level of
emissions
Initial conditions
Savings rate
Abatement intensity
Technological progress in abatement

-
k
( )
t g t t
B
t g
E
E
e e k e
n g
s
L B
e t k L B t E
o
o
| o |
o
o
u
u
u
+
|
|
.
|
\
|
+ +
O =
O =
1
) 1 (
0 0 0
0 0 0
) 0 ( 1
) 1 (
) 1 (
) ( ) 1 ( ) (
) 1 ( o
-
k
) (t y
Overview
von 36
26
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
) (T k
-
k
) (T k
BL K k / =
BL K k / =
Increase in savings rate s :

Faster capital accumulation
Magnitudes of k(T ), k* and
y(k) increase
Impact on pollution path
Thus calendar time T
increases, i.e. the
process slows down
In steady state growth
rate of emissions and
income per capita remain
unchanged

05.05.2011
Level of
emissions
E
E
-
k
T
B
Overview
Initial conditions
Savings rate
Abatement intensity
von 36
27
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
) (T k
-
k
) (T k
BL K k / =
BL K k / =
Increase in abatement
intensity , e.g. due to tighter
environmental policy:

Slows down capital
accumulation via smaller I
Magnitudes of k(T ), k*
and y(k) decrease
shortens
rate of emissions and
income per capita remain
unchanged
05.05.2011
Level of
emissions
E
E
-
k
T
B
Overview
Initial conditions
Savings rate
Abatement intensity
von 36
28
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
) (T k
-
k
) (T k
BL K k / =
BL K k / =
Increase in abatement
intensity , e.g. due to tighter
environmental policy:

Although increases g
A

remains constant, i.e.
tighter environmental
policy cannot turn an
unsustainable economy
in a sustainable one
Emission reduction is
obtained by a decrease in
k and y, NOT because of
increasingly effective
abatement

05.05.2011
Level of
emissions
E
E
-
k
T
B
Overview
Initial conditions
Savings rate
Abatement intensity
von 36
29
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
) (T k
-
k
) (T k
BL K k / =
BL K k / =
Increase in technological
progress at abatement g
A
:

g
E
= g
B
+ n g
A
decreases
Magnitudes of k(T ), and
y(T) decrease, but k*
remains unchanged
decreases
rate of emissions
decreases while growth
rate of income per capita
remain unchanged

05.05.2011
Level of
emissions
E
E
-
k
T
B
Overview
Initial conditions
Savings rate
Abatement intensity

von 36
30 05.05.2011
Overview
In fact we found an Environmental Kuznets Curve (EKC) plotting data
We identified three qualitatively different sets of determinants
a) Initial conditions affect E(t) and y(t) directly but not in steady state or
in the long run
b) savings rate s accelerates capital accumulation while abatement
intensity does not create sustainable economies and emission
reduction is not obtained by increasingly effective abatement
c) g
A
decreases g
E
, while g
B
+ n increases steady state growth rate of
emissions
Putting this together, EKC has shown, as countries develop economically,
moving from lower to higher levels of income per capita, levels of
environmental degradation such as pollution will eventually fall
Empirical examination of cross-country data has verified this relationship
for certain pollutants

von 36 31
Vielen Dank fr ihre Aufmerksamkeit !
Than for your attention!
05.05.2011
von 36
A contemporary EKC for Germany (1950 2006)
32 05.05.2011
0
50
100
150
200
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5
9
,
0
6
0
2
4
2
5
9
8
3
,
6
2
6
5
3
2
4
9
9
6
,
1
4
3
1
5
2
6
1
2
7
,
0
5
8
8
2
2
6
5
0
5
,
3
0
3
1
7
2
6
1
1
9
,
4
5
8
6
2
6
7
2
0
,
6
4
2
8
4
2
7
1
4
5
,
9
5
7
9
2
2
7
3
3
6
,
4
6
6
0
4
2
7
7
8
8
,
8
8
4
1
6
2
8
2
9
1
,
5
9
8
1
2
8
8
4
2
,
6
5
6
1
2
2
9
7
2
6
,
8
7
8
7
6
3
0
0
6
1
,
3
9
8
6
7
3
0
0
3
5
,
8
0
1
9
8
2
9
9
5
2
,
9
3
6
6
5
3
0
2
6
0
,
6
6
1
4
3
0
4
9
6
3
1
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1
1
,
6
5
1
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6
E
m
i
s
s
i
o
n
s

P
e
r

C
a
p
i
t
a

i
n

L
e
v
e
l
s

GDP Per Capita
Germany
Pollutant Emissions by GDP pc
6 000 30 000 20 000 10 000
A contemporary EKC for Germany
Speed of adjustment
Comparative steady state analysis with respect to g_B or n
Literature
Appendix
von 36
In order to investigate the peak of aggregate emissions we have to find T
Economies with identical parameters but different initial conditions
converge over time t to the same balanced growth path (-convergence)
We apply a TAYLOR-series-approximation of first order of the fundamental
equation around the steady state to
find the speed of adjustment :

We find that is independent from the abatement intensity and
savings rate s
( ) ( )k n g k s k
B
o u
o
+ + = 1
~
( )( )
-
+ + = = k k n g k k f
B
o o) 1 (
~
) (

> 0
Appendix A contemporary EKC for Germany
Speed of adjustment
Literature
von 36
34
( )
E
g n g + + o
( ) n g
+ + o
( )
1
1

o
u o k s
) (T k
-
k
) (T k
BL K k / =
BL K k / =
Increase in technological
progress at production g
B
or
population growth n:

g
E
= g
B
+ n g
A
increases
Magnitudes of k(T ), and
y(T) decrease, but k*
remains unchanged
Impact on pollution
path and calendar
time T depends on k(0)
05.05.2011
Level of
emissions
E
E
-
k
T
B
Speed of adjustment
Literature
von 36
BARROW, R. J.; SALA-I-MARTIN, X. (2004). Economic Growth. Second Edition. The MIT Press.
Cambridge, Massachussets, London, England.
BROCK, W. A. and TAYLOR, M. S. (2010). The Green Solow Model. Springer Science+Business
Media, J Econ Growth (2010) 15: pp. 127153.
FERRARA, M. and GUERRINI, L. (2009). More on the Green Solow Model with Logistic
Population Change. WSEAS Transactions on Mathematics. Issue 2, Volume 8, February
2009: pp. 4150.
KUZNETS, S. (1955). Economic growth and income inequality. The American Economic
Review. Volume XLV, No. 1, March 1955: pp. 128.
PERMAN, R. et al. (2003). Natural Resources and Environmental Economics. Pearson /
Addison Wesley, 3
rd
edition. Harlow, UK.
SOLOW, R. (1957). Technical change and the aggregate production function. Review of
Economics and Statistics, 1957, 39(3), 312320.
STEFANSKI, R. (2010). On the mechanics of the Green Solow Model. University of Oxford..
Literature
35 05.05.2011
Speed of adjustment
Literature
von 36
CO
2
-data:
Complete reference CDIAC (Carbon Dioxide Information Analysis Center).
Link to complete reference http://cdiac.ornl.gov/ftp/ndp030/CSV-FILES/
Sulfur-data:
The data is based on the following article: STERN D. I. (2006). Reversal in the trend of
global anthropogenic sulfur emissions. Global Environmental Change. Volume 16: pp.
207-220.
The article is avilable at: http://www.sterndavidi.com/Publications/GEC2006.pdf
The data we used is available at: http://www.sterndavidi.com/datasite.html
GDP-data:
Gross Domestic Product per capita by Purchasing Power Parities (in international
dollars, fixed 2005 prices). The inflation and differences in the cost of living between
countries has been taken into account.
Main sources: Cross-country data for 2005 is mainly based on the 2005 round of the
International Comparison Program.
Literature
36 05.05.2011
Speed of adjustment
Literature

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