Environmental Policy, Education and Growth: A Reappraisal when Lifetime Is Finite

This article demonstrates that when finite lifetime is introduced in a Lucas (1988) growth model, the environmental policy may enhance growth both in the short- and the long-run, while pollution does not influence educational activities, labor supply is not elastic and human capital does not enter the utility function. This is because finite lifetime and the appearance of newborns at each date creates a turnover of generations which disconnects the aggregate consumption growth to the interest rate. We show that the shorter is the horizon, the greater the effect of the environmental policy on growth, because the higher the “generational turnover effect”. We also demonstrate that when time is not the single production factor in education, the environmental policy promotes growth only if time remains the predominant factor. Otherwise, the crowding-out effect of the tighter environmental policy dominates the “generational turnover effect” and growth diminishes. Finally, when the source of pollution is final output rather than physical capital and time is the single factor in education, the environmental does not affect growth in the steady-state, despite the “generational turnover effect”. Nevertheless, if the education good is introduced, the positive influence of the environmental policy appears again.