Growth with Heterogeneous Capital for Polluting and Non-Polluting Technologies

Abstract. We analyze optimal growth in an economy with two capital stocks associated with different technologies, one of them being clean, the other one causing environmental damages. Capital cannot be shifted between the two sectors of the economy. This assumption restricts the pace of substitution between the different technologies. Hence, we obtain a more realistic picture about the transitional dynamics towards the steady state. Given certain initial volumes of the capital stocks, we study the model dynamics by means of some simulations. We show that in case the two capital stocks differ substantially in size the optimal paths of both capital stocks need not be monotonic. One major policy implication can be derived from our model. Ensuring sound macroeconomic performance in the presence of a technology shift calls for its anticipation, via a sufficiently early and continuous build-up of the alternative capital stock