This paper studies a multi-sector growth model where emissions from fossil fuels give riseto a climate externality. Each sector is impacted heterogeneously by climate change whichtogether with technological differences induces factor reallocation over time. By solving thesocial planners problem and characterizing the competitive equilibrium this paper derivesa simple formula for optimal taxes and sectoral factor allocation which shows how theelasticity of substitution between sectors impact on taxes through differences in technol-ogy as well as sensitivity to climate change. I also present separate numerical simulationsfor how optimal policies differ depending on sectoral composition, exemplified by the U.Sand Indian economy. The results show how climate change, technological development and the elasticity of substitution can impact on optimal fossil fuelconsumption over time.
Keywords: Structural change, climate change, economic growth
Citation: Engström, G. 2016 Structural Change and Economic Dynamics 37:62–74. http://dx.doi.org/10.1016/j.strueco.2015.11.007