The Interaction Between Structural Transformation and the Environment: A Two-Sector General Equilibrium Analysis

Sammanfattning: Economic development is accompanied by sectoral reallocation from the goods (agriculture and industry) sector to the service sector. This structural change, in turn, can explain the emission intensity patterns in most regions of the world. Thus, this thesis develops a two-sector general equilibrium model taking the circular relationship between structural transformation and emissions into account. One direction of this relationship consists of the composition effect which captures the effect of a decreasing goods share on emissions. The other direction covers environmental policies such as exogenous CO2 taxes or Pigouvian taxes. The latter taxes factor in the consequences of climate change by taking the accumulating character of CO2 emissions into account. I find that the introduction of environmental policies leads to a considerable acceleration of structural transformation with lower emissions and higher per period utility than laissez-faire policies. Moreover, policies that are targeted against climate change, i.e. accounting for the accumulation of emissions, are even more stringent. The model is calibrated to the USA in 1950 which had a similar structural composition as many developing countries today. This implies that rigorous policies against climate change could have significant effects on developing countries' structural change.