In this paper we study the impact of environmental pollution in an endogenous

growth model with endogenous structural change. The paper allows for both

horizontal and vertical innovations where newer technologies are less polluting

compared to older ones. The analysis shows that the presence of environmental

externalities stimulates structural change but reduces the growth rate of the

economy. Further, comparing the models with and without structural change

demonstrates that the latter implies stronger environmental damages and, consequently,

a lower growth rate than the first one. Finally, levying a tax on the

polluting output speeds up structural change, thus, reducing environmental pollution

and spurring economic growth.