Striking the Balance: Economic Growth vs. Environmental Protection with the BCE Model

How do we find the optimal balance between economic growth and environmental protection? The Basic Climate Economy (BCE) model offers a powerful framework for understanding this crucial relationship. By incorporating the interplay between fossil resource depletion, pollution accumulation, and economic growth, we can chart a path toward truly sustainable development.

The Challenge

Climate change presents us with a complex optimization problem: how to maintain economic growth while managing resource depletion and environmental damage. The BCE model tackles this by examining the relationships between manufacturing, investment, and environmental impact.

The Basic Climate Economy Model

The BCE model integrates several key components:

• Non-renewable resource stock depletion
• Pollution stock accumulation
• Endogenous economic growth
• Climate-induced capital depreciation

Key Findings

Our analysis reveals several critical insights about optimal climate policy:

• The social cost of carbon must account for both direct environmental damage and indirect effects on capital depreciation
• Optimal resource extraction follows a modified Hotelling rule that incorporates environmental externalities
• The growth rate of consumption depends crucially on the damage function and social discount rate

Policy Implications

These findings have significant implications for climate policy design. The model shows that achieving sustainable growth requires careful calibration of carbon pricing and investment in clean technologies, while accounting for the complex dynamics between economic and environmental systems.