Environmental drag: evidence from Norway

Economic growth affects the environment negatively. A polluted environment and other environmental constraints reduce economic output and the well-bei ng of consumers. The cost to society of environmental constraints may be ca lled the environmental drag. The traditional economic analysis of growth ne glects the environmental drag, while this paper attempts to measure it empi rically. We employ a dynamic general equilibrium model of the Norwegian eco nomy, extended to include some important environmental linkages, which feed back to the productivity of labor and capital from damages to health, mate rials and nature. The environment also directly affects the consumers' well -being. Using this model, we are able to estimate the environmental drag, m easured as reduced welfare from consumption and environmental services. We present macroeconomic effects in terms of reduced production and consumptio n, and calculate the overall welfare effects. We find that the environmenta l constraints incorporated in the model probably have a modest effect on pr oduction over the next century. The direct welfare loss from a degraded env ironmental quality, however, is significant. A lower rate of technological growth and a lower discount rate both increase the drag. (C) 1999 Elsevier Science B.V. All rights reserved.