On the impossibility of sustainable growth in a manufacturing based economy

Abstract This paper investigates a possibility of sustainable growth in a multi-output endogenous growth framework where the capital accumulation takes place mainly through the production of the dirty manufactured goods. It is shown that in a closed economy, economic growth is not environmentally sustainable, even under an optimal pollution tax unless the consumption elasticity of substitution between clean and dirty goods approaches infinity as in a small open economy which exports dirty goods. There exists a minimal threshold level of the ratio of clean to dirty capital that ensures sustainable growth in a closed economy.