Creative destruction vs destructive destruction: A Schumpeterian approach for adaptation and mitigation

Abstract

This article aims to demonstrate how a market exposed to a catastrophic event strives to find a balance between adaptation and mitigation policies through R&D strategies. Our analysis reveals that, within our framework, there exists no trade-off between adaptation and mitigation. Rather, the critical relationship exists between adaptation and pollution because adaptation (wealth accumulation) increases the growth rate of the economy, leading to a higher flow pollution due to the scale effect. We also investigate the long-run effects of pollution taxes on growth rates and the influence of the probability of catastrophic events on these outcomes. Our findings suggest that even with a higher likelihood of catastrophe, the economy can elevate its R&D endeavors, provided that the penalty rate stemming from an abrupt event remains sufficiently high and the economy confronts a risk of a doomsday scenario. Additionally, we illustrate that pollution taxes can foster heightened long-term growth, with the positive effects being more pronounced when the probability of catastrophe is elevated, assuming an adequately substantial penalty rate. Finally, we find that pollution growth can be higher with less polluting inputs due to a scale effect, a phenomenon akin to the Jevons-type paradox.