We develop and quantify a theory in which rising incomes and technological change redirect economic activity from material production toward intangible quality, generating an endogenous decline in emissions intensity. We document two motivating empirical patterns: greater service intensity is systematically associated with lower emissions per dollar, and U.S. patenting has shifted from innovations that raise material productivity toward those that enhance final use quality. Nonhomothetic preferences shift expenditure toward quality-intensive goods; physical inputs and producer services are complements; and innovative effort is endogenously allocated between material productivity and final-use quality. In equilibrium, the economy becomes ?weightless?: innovation becomes increasingly quality-oriented, services dominate employment, and material production converges to a finite level. At the same time, welfare continues to grow because of rising quality. The calibrated model accounts for the rise of services, the measured productivity slowdown, and the long-run path of CO2 emissions. We use it to evaluate the aggregate and distributional welfare effects of environmental policies that redirect innovation and accelerate structural transformation.

Philippe Aghion, Timo Boppart, Michael Peters, Matthew Schwartzman and Fabrizio Zilibotti

18 September 2026     Paper Number POIDWP150

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