Wang, F., Liao, H. and Tol, RichardS.J. (2025). Baumol’s climate disease European Economic Review, 180:1--33.

We investigate optimal carbon abatement in a dynamic general equilibrium climate-economy model with endogenous structural change. By differentiating the production of investment from consumption, we show that social cost of carbon can be conceived as a reduction in physical capital. In addition, we distinguish two final sectors in terms of productivity growth and climate vulnerability. We theoretically show that heterogeneous climate vulnerability results in a climate-induced version of Baumol{\textquoteright}s cost disease. Further, if climate-vulnerable sectors have high (low) productivity growth, climate impact can ameliorate (aggravate) the Baumol{\textquoteright}s cost disease, call for less (more) stringent climate policy. We conclude that carbon abatement should not only factor in unpriced climate capital, but also be tailored to Baumol{\textquoteright}s cost and climate diseases.