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Recently, many countries are planning to stimulate public R&D investment for carbon-neutral, sustainable economic growth by 2050. To explore the effects of fiscal policies on long-run sustained growth, this paper uses a one-sector dynamic model of endogenous growth, based on the joint evolution of private capital, abatement knowledge capital and natural capital. Extending the related literature, it presents explicitly a closed-form solution to the government fiscal rules on public investment and taxation for ecologically-sustainable economic growth. According to the results, the long-run sustained balanced- growth path and the effects of environmental fiscal policies hinge crucially on key parameters such as production elasticity of abatement knowledge and the difference between the productivities of abatement knowledge and pollution in production.
Moreover, unlike the previous results in Barro (1990), Barro and Sala-i-Martin (1992) and Bovenberg and Smulders (1995, 1996), the rate of public environmental investment that maximizes the long-run growth rate should be greater than its own ‘pure’ output elasticity by the amount of the premium for environmental sustainability. Thus, the findings demonstrate that the overall abatement knowledge intensity of production in the economy should be directed by this fiscal rule.
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