Climate Change, Industrial Transformation, and “Environmental Growth Traps”

This paper examines the potential interactions in the global economy between the impacts of climate change on productivity with existing technology, and increasing returns in the development of less vulnerable and lower-emission technology. A simple specification is used in which the global economy can produce a single homogeneous consumption good with two different technologies. The “old” technology has global diminishing returns to scale and depends on the use of fossil energy that gives rise to long-lived, damaging climate change. The “new” technology has convex-concave production due to set-up cost and is not vulnerable to climate change. Through simulations we show that if output with the new technology does not grow fast enough to move through the phase of increasing returns, then the economy could experience an “environmental growth trap”—lingering at a low level of income indefinitely, or achieving some progress but then getting driven back to a lower level of income by productivity-reducing environmental degradation. We discuss how the prospects of such a trap depend on the productivity and energy intensity of the old technology as well as the magnitude of the set-up cost.