The growth-environment trade-off: Horizontal vs Vertical innovations Gunningham

This paper explores the trade-off between economic growth and en-vironmental quality along two paradigms of endogenous growth the-ory: variety expansion (HIP) and quality improvements (VIP). We compare the policies that match the decentralized economies ’ paths with the optimal “strong sustainable ” growth path, characterized by growth in consumption and improvements in environmental quality. Three policy tools are employed: subsidies to monopolists and R&D, and taxes on emissions. The latter is increasing at the optimum, to keep the weight of tax revenues over output constant. All policy tools equal, the growth rate is higher in the VIP than in the HIP. The op-timal subsidy to R&D is therefore greater and the cumulative loss in output smaller under HIP than the VIP