A Theory of Endogenous Degrowth and Environmental Sustainability

We develop and quantify a theory in which rising incomes and technological change redirect economic activity from material production toward intangible quality, generating an endogenous decline in emissions intensity. We document two motivating empirical patterns: greater service intensity is systematically associated with lower emissions per dollar, and U.S. patenting has shifted from innovations that raise material productivity toward those that enhance final-use quality. Nonhomothetic preferences shift expenditure toward quality-intensive goods; physical inputs and producer services are complements; and innovative effort is endogenously allocated between material productivity and final-use quality. In equilibrium, the economy becomes “weightless”: innovation becomes increasingly quality-oriented, services dominate employment, and material production converges to a finite level. At the same time, welfare continues to grow because of rising quality. The calibrated model accounts for the rise of services, the measured productivity slowdown, and the long-run path of CO2 emissions. We use it to evaluate the aggregate and distributional welfare effects of environmental policies that redirect innovation and accelerate structural transformation.