Capital accumulation, interest rate, and the income-pollution pattern. A simple model

In this paper we use a modified Ramsey-Cass-Koopmans model to show that the inverse U-shaped income-pollution relationship may be explained through the decreasing of the interest rate over time and with a growth in income. If the problem of the benevolent planner is (whether and how) to implement a policy for environmental pollution abatement to maximize social welfare, the rate of interest plays a fundamental role in determining the moment at which such a policy should be adopted. In particular, growth and capital accumulation together reduce the marginal rate of return of savings (and capital), making it possible to implement environmentally friendly devices at the moment when the country grows richer and its rate of interest becomes lower than the social discount rate.