Balancing Growth in a Warming World

This paper develops a theory of balanced growth and optimal climate policy in an integrated assessment framework. Balanced growth is possible despite climate change, but at a slower rate. Two distinct policy regimes emerge because emissions permanently raise carbon stocks. For low damages, optimal growth coincides with the laissez-faire and carbon is priced at a constant rate. For high damages, optimal policy caps temperature growth to prevent escalating losses and achieve faster economic growth than in the laissez-faire by pricing carbon at an increasing rate. We quantify our model and show that empirical damage estimates span both regimes. For low damages, optimal policy achieves a 1% welfare gain with 3 to 8°C of warming per century and no change in long-run growth. For high damages, optimal policy raises annual growth by 0.8 percentage points and achieves a 26% welfare gain by capping warming at 0.4°C per century.