By Philippe Aghion, Professor of Economics at the College de France, INSEAD, and the London School of Economics, along with Timo Boppart, Michael Peters, Matthew Schwartzman, and Fabrizio Zilibotti

  March 19, 2025 — Centre for Economic Performance, Paper No. CEPDP2086 (Discussion Paper)

ABSTRACT: We develop and quantify a growth theory where consumers' preferences are defined over products with varying environmental impacts. Preferences are non-homothetic: Necessities are intensive in material inputs whose production leads to high emissions, while luxury goods, being more reliant on services, exhibit a comparatively lower environmental footprint. Directed innovation is the focal point of the study: it can be aimed at either enhancing the productivity of material production or refining the quality of luxury goods. Over time, innovation increasingly prioritizes quality improvement, consequently reducing the environmental impact of economic growth. The pace of structural transformation and the composition of GDP are both endogenous and susceptible to policy interventions. The shift towards quality-oriented growth may result in a decline in (mis)measured GDP growth without a decrease in welfare. Extending the model to a two-country trade scenario reveals that trade barriers could have a detrimental effect on environmental sustainability.

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