Environmental Regulation, Directed Technical Change, and Economic Growth: Theoretic Model and Evidence from China

Abstract

Can environmental regulation be used to promote directed technical change and economic growth simultaneously? We construct an endogenous economic growth model that includes environmental regulation, the extent of environmental pollution, and economic performance in a general equilibrium framework. We show that in the absence of government intervention, environmental pollution will not automatically disappear as economic growth increases. Furthermore, “threshold constraints” result from “path dependence” in the type of innovation; only when the rate of carbon tax and carbon reduction subsidy reaches a certain extent will individuals (or producers) redirect technical change toward “clean” energy production technologies innovation and away from “dirty” energy production technologies. Our article also discloses the intrinsic principle and micromechanism of environmental regulation to promote economic growth and finds that strict environmental regulation will both significantly promote the evolving labor division in clean energy production technologies innovation and achieve the benefits of improved average labor productivity in the production sector and the market size of goods, so that the benefit exceeds the switching cost.