Baumol’s climate disease

Fangzhi Wang, Hua Liao and Richard S.J. Tol

European Economic Review, 2025, vol. 180, issue C

Abstract: We investigate optimal carbon abatement in a dynamic general equilibrium climate-economy model with endogenous structural change. By differentiating the production of investment from consumption, we show that social cost of carbon can be conceived as a reduction in physical capital. In addition, we distinguish two final sectors in terms of productivity growth and climate vulnerability. We theoretically show that heterogeneous climate vulnerability results in a climate-induced version of Baumol’s cost disease. Further, if climate-vulnerable sectors have high (low) productivity growth, climate impact can ameliorate (aggravate) the Baumol’s cost disease, call for less (more) stringent climate policy. We conclude that carbon abatement should not only factor in unpriced climate capital, but also be tailored to Baumol’s cost and climate diseases.

Keywords: Structural change; Climate capital; Integrated assessment model; Social cost of carbon; Baumol’s cost disease (search for similar items in EconPapers)
JEL-codes: O44 Q54 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:180:y:2025:i:c:s0014292125002259

DOI: 10.1016/j.euroecorev.2025.105175

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