Economic Growth and Global Warming: A Model of Multiple Equilibria and Thresholds

This paper studies the dynamics of an economic growth model with global warming. Recent research on climate change suggests that there exists a negative feedback effect from global surface temperature and the capacity of the earth to reflect radiation. Our paper takes into account that the ratio of reflected to incident radiation of the earth, i.e. the albedo, negatively depends on the average surface temperature. We presume a simple model of endogenous growth where economic growth is affected by global warming and analyze the dynamics of economic growth and global warming for both the problem of a competitive economy and the social planner’s problem. Our regulatory instrument is an emission tax rate. We demonstrate that for certain values of the emission tax ratio the competitive economy exhibits multiple equilibria and a threshold may exist which separates the domains of attraction for the growth paths. There exist paths to high growth rates and low temperature and low growth rates and high temperature, separated by a threshold. For the planner’s problem the long run equilibrium is unique unless the damage of global warming is very small.