The structural shift to green services: A two-sector growth model with public capital and open-access resources

• I study the properties of a structural shift towards labour-intensive green services.
• I build a two-sector growth model with public capital and common resources.
• Despite economic growth, ecological degradation leads to long-run welfare stagnation.
• In the transition to the BGP a shift to green services generates a rise in welfare.
• Public capital policies can have non-trivial consequences on growth and welfare.

An expansion of economic activities with low impact on ecological resources is a crucial component of the transition to a low-carbon society. “Green” structural change is analysed here through a model with a “progressive” manufacturing sector and a “stagnant” service sector. The latter represents an increasingly demanded class of services characterised by high intensity of labour, low productivity growth and reduced impact on resources. A stock of public capital enhances productivity growth in the manufacturing sector, whose output negatively affects an environmental asset entering households’ welfare function. Along the balanced growth path a substitution process between “dirty” consumption and the open-access asset takes place, leading to a stagnation in welfare despite the positive growth rate. Structural change towards green service occurs along the transition to the BGP any time the public-to-private capital ratio is above its long-run level, and is associated with a decrease in consumption growth, a reduction in working hours and a decline in the environmental degradation rate. A numerical example illustrates that the overall positive effect on households’ welfare can be positive. Finally, it is shown how infrastructure policies can have non-trivial consequences on long-run growth, welfare and environmental sustainability.