Table Of ContentDynamic Modeling and Econometrics in
Economics and Finance
Volume 14
Editors
StefanMittnik
UniversityofMunich
Munich,Germany
WilliSemmler
BielefeldUniversity
Bielefeld,Germany
and
NewSchoolforSocialResearch
NewYork,USA
Forfurthervolumes:
www.springer.com/series/5859
Jesús Crespo Cuaresma (cid:2) Tapio Palokangas (cid:2)
Alexander Tarasyev
Editors
Green Growth
and Sustainable
Development
Editors
JesúsCrespoCuaresma AlexanderTarasyev
DepartmentofEconomics DynamicSystems
ViennaUniversityofEconomics InstituteofMathematicsandMechanics,
andBusiness UrBRAS
Vienna,Austria Ekaterinburg,Russia
and
AdvancedSystemAnalysis
TapioPalokangas InternationalInstituteforAppliedSystems
UniversityofHelsinkiandHECER Analysis(IIASA)
Helsinki,Finland Laxenburg,Austria
ISSN1566-0419
ISBN978-3-642-34353-7 ISBN978-3-642-34354-4(eBook)
DOI10.1007/978-3-642-34354-4
SpringerHeidelbergNewYorkDordrechtLondon
LibraryofCongressControlNumber:2012955487
©Springer-VerlagBerlinHeidelberg2013
Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartof
thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation,
broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation
storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology
nowknownorhereafterdeveloped.Exemptedfromthislegalreservationarebriefexcerptsinconnection
with reviews or scholarly analysis or material supplied specifically for the purpose of being entered
and executed on a computer system, for exclusive use by the purchaser of the work. Duplication of
this publication or parts thereof is permitted only under the provisions of the Copyright Law of the
Publisher’slocation,initscurrentversion,andpermissionforusemustalwaysbeobtainedfromSpringer.
PermissionsforusemaybeobtainedthroughRightsLinkattheCopyrightClearanceCenter.Violations
areliabletoprosecutionundertherespectiveCopyrightLaw.
Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication
doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant
protectivelawsandregulationsandthereforefreeforgeneraluse.
Whiletheadviceandinformationinthisbookarebelievedtobetrueandaccurateatthedateofpub-
lication,neithertheauthorsnortheeditorsnorthepublishercanacceptanylegalresponsibilityforany
errorsoromissionsthatmaybemade.Thepublishermakesnowarranty,expressorimplied,withrespect
tothematerialcontainedherein.
Printedonacid-freepaper
SpringerispartofSpringerScience+BusinessMedia(www.springer.com)
Introduction
This book examines problems associated with green growth and sustainable de-
velopment using economic theory, systems theory and optimal control theory.
Especially, questions of sustainability of economic growth are crucial for green
economiesenvisaginglocalandglobalenvironmentalconstraints,biodiversityman-
agement, human capital development, improvements in resource productivity, and
investments in new technologies. The focus is on elaboration of series of mod-
els which catch interactions of production factors as driving forces of economic
growth.
ThebookisbasedonmaterialprovidedfortheSymposium“GreenGrowthand
Sustainable Development Symposium” held at the International Institute for Ap-
plied Systems Analysis (IIASA) on the 9th–10th of December, 2011, within the
IIASAProject“DrivingForcesofEconomicGrowth”(ECG).Thesymposiumwas
organizedbycoordinatorsoftheECGproject:JesusCrespo-CuaresmafromIIASA
WorldPopulationProgram,TapioPalokangasandAlexanderTarasyevfromIIASA
AdvancedSystemsAnalysisProgram.
Thechaptersofthebookarepresentedinapopular-sciencestyleandcanbein-
terestingtoawiderangeofscientificliteraturereaders.Theprimeaudienceforthe
bookiseconomists,environmentalmanagers,mathematiciansandengineerswork-
ingonproblemsofeconomicgrowthandenvironmentregulation.Themathematical
partofthebookiswritteninarigorousmanner,andthedetailedanalysisisexpected
tobeofinteresttospecialistsindynamicsystems,optimalcontrolandapplications
toeconomicmodeling.
The book starts with three chapters on optimal economic growth with environ-
mentalconstraints,continueswiththreechaptersonthecontrolofclimatechange,
abatement and biodiversity, and with two chapters on dynamics of environmental
policy,andendsupwithtwoapplicationsofsystemstheorytothesupplyofenergy.
As a whole, the book provides an integrated view on environmental policy in the
settingofeconomicgrowthanddynamics.
The first part, “Optimal Economic Growth with an Environmental Constraint”,
is devoted to methodological problems of economic growth arising in presence of
environmental constraints and lack of resources. It considers models oriented on
v
vi Introduction
optimizationofinvestmentsinproductionfactors,examinesoptimaltransitionaldy-
namicsandforecastsfuturetrendsofeconomicdevelopment.
SergeyAseev,KonstantinBesov andSergueiKaniovskistudy optimalresearch
and extraction policies in an endogenous growth model in which both production
andresearchuseexhaustibleresources.Theyshowthatoptimalgrowthisnotsus-
tainableif the accumulationof knowledgeuses exhaustibleresources, or if the re-
turnstoscaleinresearcharedecreasing,ortheeconomyistoosmall.Theauthors
statethemodelasaninfinite-horizonoptimalcontrolproblemwithanintegralcon-
straintonthecontrolvariables.Theyconsiderthemainmathematicalaspectsofthe
problem, establish an existence theorem and derive an appropriate version of the
Pontryaginmaximumprinciple,andgiveacompletecharacterizationoftheoptimal
transitionaldynamics.
UllaLehmijokidevelopsalong-runconsumeroptimizationmodelwherepollu-
tionaggravatesmortality.Inthatmodel,theoptimalgrowthpathissustainableifit
providesnon-decreasingconsumptionforanon-decreasingpopulation.Asusually,
optimalityandsustainabilitymayconflict;withpopulationendogenoustopollution,
thisconflictmayultimatelyleadthehumanspeciestowardself-imposedextinction.
Inthatcase,noteventechnicalprogresscanwarrantsustainability.
Alexander Tarasyev and Bing Zhu analyse a dynamic optimization model of
investment in the improvement of resource productivity in order to find balanced
growth trends in terms of consumption and the use of natural resources. This re-
search is closely connected with the problems concerning shortages of natural re-
sourcestocks,thesecurityofsupplyofenergyandmaterials,andtheenvironmental
effectiveness of their consumption. The author’s main idea is to introduce an in-
tegrated environment to control the management of the investment process in the
development of basic production factors such as capital, energy and material con-
sumption. Essential features of the model are (i) the possibility to invest in econ-
omy’sdematerializationand(ii)thepriceformationmechanismwhichpresumesthe
rapid growth of prices on exhausting materials. The authors solve optimal control
problemfortheinvestmentprocessbythePontryaginmaximumprinciple,showing
thatforspecificrangeofthemodelparameters,thereexiststheuniquesteadystate
oftheHamiltoniansystem.Thisenablestheexistenceofasustainablegrowthpath
inaneconomywithexhaustingresources.Bytheseresults,strategiesforinvestment
in dematerialization, resource and environmental management can be constructed
forthepurposetoshifttheeconomicsystemfromnon-optimalpathstosustainable
development.
The second part, “Biodiversity, Abatement and Climate Change”, comprises
chaptersthataddressapplicationofdynamicsystemsmodelingtoeconomicgrowth,
withespecialfocusonissuesofenvironmentalimpactandpolicyregulation.
TapioPalokangasexaminesagroupofcountrieswheretheconservationofland
anywhereyieldsutilityeverywherethroughbiodiversity.Allcountriesproducethe
same good from labor and land and improve their productivity through abatement
investment. The international agency performing biodiversity management is self-
interested.Palokangascomparesthreecasesofbiodiversitymanagement:(i)laissez-
faire,(ii)theregulationoflanduse,and(iii)subsidiestotheconservationofland.
Introduction vii
Hisresultsarethefollowing.Regulationpromotesbiodiversity,abatementandwel-
fare. Because subsidies must be financed by distortionary taxes, the replacement
ofregulationbysubsidieshampersbiodiversity,abatementandwelfare.Appliedto
NATURA 2000 in the EU, this suggests that regulation without any budget is the
appropriatedegreeofauthorityfortheCommission.
Due to recent global discussions about climate change and its possible conse-
quences,theusageofenvironmentalpolicyinstrumentswiththeintenttocounteract
againstthecurrentenvironmentaldevelopmentshasbecomeincreasinglyimportant.
Elke Moser, Alexia Prskawetz and Gernot Tragler investigate the impact of envi-
ronmentalstandardsoncapitalaccumulationandR&Dinvestmentsinaneconomy
whereboth,brown(dirty)aswellasgreen(clean)capitalcanbeusedinproduction.
Environmentalregulationaspolicyinstrumentiscommonlysupposedtoreduceor
ideally minimize emissions and pollution. The authors show that such regulations
can repress innovation and economic growth rather than induce a shift toward a
greenertechnology.
Nordhaus(2000,2008)developedadynamicmodelthatlinkseconomicgrowth
with climate change. Helmut Maurer, Johann Jacob Preuß and Willi Semmler
present variants of that model, building on the dynamic model of Greiner et al.
(2010),whodiscussmultipleequilibriaandthresholdsinacanonicaloptimalcon-
trolproblemwithinfinitehorizon.Theauthorsstudyvariousextensionsofthebasic
optimal control problem and compare the solutions for finite horizon and infinite
horizon.Theyadmitterminalconstraintsforthestatevariable,considertheimpacts
ofconstraints(suchasCO2andtemperatureconstraints)onabatementpoliciesand
consumption, and attempt to control the temperature by suitable penalties on the
temperature.Theintroductionoftheseconstraintsallowsexploringtheimplications
for mitigation policies that arise from the Kyoto treaty (CO2 constraint) and the
Copenhagenagreement(temperatureconstraint).
The third part, “Dynamics of Environmental Policy with an Oligopoly”, deals
with dynamic game modelingof oligopolisticcompetitionwith environmentalex-
ternalities.
LucaLambertiniandGeorgeLeitmannadoptastepwiseapproachtotheanalysis
of a dynamic oligopoly game in which production exploits a natural resource and
pollutestheenvironment.Theystartwithsimplemodelswherefirms’outputisnot
afunctionofthenaturalresource toendupwithafull-fledgedmodelinwhich(i)
the resource is explicitly considered as an input of production and (ii) the natural
resource and pollution interact via the respective state equations. They show that
therelationshipbetweenthewelfarepropertiesoftheeconomicsystemandthein-
tensityofcompetitionissensitivetothedegreeofaccuracywithwhichthemodelis
constructed.
Theestablishedviewonoligopolisticcompetitionwithenvironmentalexternal-
ities has it that, since firms neglect the external effect, their incentive to invest in
R&D for pollution abatement is nil unless they are subject to some form of envi-
ronmental taxation. Davide Dragone, Luca Lambertini and Arsen Palestini take a
dynamic approach to this issue, showing by a simple differential game that con-
clusion reached by the static literature is not robust: the introduction of dynamics
viii Introduction
showsthatfirmsdoinvestinR&Dforenvironmental-friendlytechnologiesthrough-
outthegame,aslongasR&Disaccompaniedbyanoutputrestrictionexhibitinga
distinctively collusive flavor. The authors show that there exists a feasible tax rate
thatinducesprofit-seekingfirms to choosea combinationof outputandR&D that
imposesthesamelevelofsocialwelfareasinthefirstbest.
Thefourthpart,“ApplicationofDynamicSystemstoEnergySupply”,consistsof
papersthatanalyseoftheroleofenergysupplyandnewtechnologiesineconomic
growthandenergytransition.
ChihiroWatanabeandJae-HoShinconsidergreentechnologydrivenenergyfor
sustainablegrowthbytheJapaneseexample.Japanhasconstructedasophisticated
co-evolutionary dynamism between innovation and institutional systems by trans-
forming external crises into a springboard for new innovation.This can largely be
attributedtotheuniquefeaturesofthenationsuchashavingastrongmotivationto
overcoming fear based on xenophobia and uncertainty avoidance as well as abun-
dant curiosity, assimilation proficiency, and thoroughness in learning and absorp-
tion.Suchexplicitdynamismwastypicallydemonstratedbytechnologysubstitution
for energy in the 1970s leading Japan to achieve a high-technology miracle in the
1980s.Whilethisdynamismshiftedtotheoppositedirectioninthe1990sduetoa
systemconflictwiththeriseoftheinformationsociety,recentincreaseinoilprices
has signaled the possibility of a paradigm shift to a post-oil society. In addition,
globaleconomicstagnationduetoexcessiveconsumptionhasbeeninducing“new
normal”customerssupra-functionality.Theauthorsshowbyempiricalanalysisthat
thesetrendsinevitablycompeltoexplorehighefficientphotovoltaic(PV)system.
BoHu,ArminLeopoldandStefanPicklpresentaSystemDynamicsmodelthat
depicts the development of the energy market in Germany in an aggregated form.
Theyusethatmodeltocomparedifferentpossiblepathwaysoftheimpedingenergy
transition.TheirsimulationsshowthataconceptpresentedbytheGermanAdvisory
Council on Environment (SRU) will only achieve about 31% GHG mitigation in
2025comparedto1990,despitethehighcostsduetoplannedhugestoragecapacity.
A more effective GHG mitigation of about 40% can be achieved at a lower cost
bymakinguseofhigherwindandphotovoltaiccapacitiesincombinationwiththe
capabilitytoproducesyntheticnaturalgas(SNG)usingexcesselectricityfromwind
andsolarenergy.
Weexpectthattheresultsofthismonographprovidereaderswithamethodologi-
caltechniqueandmodelingenvironmentforanalysisofeconomicgrowthprocesses,
and give an instrument for forecasting growth trends and improving its precision.
Furthermore,themodelselaboratedinthebookcouldserveashelpfultoolsforpol-
icyadviceindesigningstrategiesofeconomicandenvironmentalmanagement.
Contents
PartI OptimalEconomicGrowthwithanEnvironmentalConstraint
The Problem of Optimal Endogenous Growth with Exhaustible
ResourcesRevisited. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SergeyAseev,KonstantinBesov,andSergueiKaniovski
OptimalPollution,OptimalPopulation,andSustainability . . . . . . . . 31
UllaLehmijoki
OptimalProportionsinGrowthTrendsofResourceProductivity . . . . . 49
AlexanderTarasyevandBingZhu
PartII Biodiversity,AbatementandClimateChange
InternationalBiodiversityManagementwithTechnologicalChange . . . 69
TapioPalokangas
EnvironmentalRegulations,AbatementandEconomicGrowth . . . . . . 87
ElkeMoser,AlexiaPrskawetz,andGernotTragler
Optimal Control of Growth and Climate Change—Exploration of
Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
HelmutMaurer,JohannJakobPreuß,andWilliSemmler
PartIII DynamicsofEnvironmentalPolicywithanOligopoly
MarketPower,ResourceExtractionandPollution:SomeParadoxesand
aUnifiedView. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
LucaLambertiniandGeorgeLeitmann
The Incentive to Invest in Environmental-Friendly Technologies:
DynamicsMakesaDifference . . . . . . . . . . . . . . . . . . . . . . 165
DavideDragone,LucaLambertini,andArsenPalestini
ix
x Contents
PartIV ApplicationsofDynamicSystemstoEnergySupply
UtmostFearHypothesisExploresGreenTechnologyDrivenEnergyfor
SustainableGrowth . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
ChihiroWatanabeandJae-HoShin
TransitionTowardsRenewableEnergySupply—ASystemDynamics
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
BoHu,ArminLeopold,andStefanPickl
Contributors
SergeyAseev InternationalInstituteforAppliedSystemsAnalysis(IIASA),Lax-
enburg,Austria;SteklovMathematicalInstitute,Moscow,Russia
KonstantinBesov SteklovMathematicalInstitute,Moscow,Russia
DavideDragone DepartmentofEconomics,UniversityofBologna,Bologna,Italy
BoHu UniversitätderBundeswehrMunich,Neubiberg,Germany
Serguei Kaniovski Austrian Institute of Economic Research (WIFO), Vienna,
Austria
Luca Lambertini Department of Economics, University of Bologna, Bologna,
Italy;ENCORE,UniversityofAmsterdam,Amsterdam,TheNetherlands
UllaLehmijoki UniversityofHelsinkiandHECER,Helsinki,Finland
George Leitmann College of Engineering, University of California at Berkeley,
Berkeley,CA,USA
ArminLeopold UniversitätderBundeswehrMunich,Neubiberg,Germany
HelmutMaurer InstitutfürNumerischeundAngewandteMathematik,Universität
Muenster,Münster,Germany
Elke Moser Wittgenstein Centre (IIASA, VID/ÖAW, WU), VID/ÖAW, Vienna,
Austria
ArsenPalestini MEMOTEF,SapienzaUniversityofRome,Rome,Italy
TapioPalokangas UniversityofHelsinkiandHECER,Helsinki,Finland
StefanPickl UniversitätderBundeswehrMunich,Neubiberg,Germany
JohannJakobPreuß InstitutfürNumerischeundAngewandteMathematik,Uni-
versitätMuenster,Münster,Germany
xi
