Growth and non-renewable resources: The di¤erent roles of capital and resource taxes

We contrast e¤ects of taxing non-renewable resources with the e¤ects of traditional capital taxes and investment subsidies in an endogenous growth model. In a simple framework we demonstrate that when non-renewable resources are a necessary input in the sector where growth is ultimately generated, interest income taxes and investment subsidies can no longer a¤ect the long-run growth rate, whereas resource tax instruments are decisive for growth. The results stand out both against observations in the literature from the 1970’s on non-renewable resources and taxation observations which were not based on general equilibrium considerations and against the general view in the newer literature on taxes and endogenous growth which ignores the role of non-renewable resources in the “growth engine”. Keywords: Non-renewable resources; Endogenous growth; Capital taxation; Resource taxation; Carbon taxes; Climate change; Optimal taxation. JEL Classi…cation: H2; O4; Q3. — — — Helpful comments by two anonymous referees are gratefully acknowledged. We have also bene…ted from comments by Carl-Johan Dalgaard and participants at the ASSET conference, Cyprus, 2002, and at an EPRU seminar, University of Copenhagen, 2003. Remaining errors are ours. The activities of EPRU (Economic Policy Research Unit) are supported by a grant from The Danish National Research Foundation.