Sustainable Economic Development and the Environment: Theory and Evidence

The relationship between growth and pollution is studied through a vintage capital model, where new technologies are more environmentally friendly. We ¯nd that once the optimal scrapping age of technologies is reached, an economy may achieve two possible cases of sustainable development, one in which pollution falls and another in which it stabilizes, or a catastrophic outcome, where environmental quality reaches its lower bound. The outcome will depend on countries' investment path and their propensity to innovate in environmentally clean technologies, both of which are likely to di®er across economies. Empirical results using long time series for a number of developed and developing countries indeed con¯rm heterogenous experiences in the pollution-output relationship.