Climate Change, Industrial Transformation, and "Development Traps"
This paper examines the possibility of environmental "development traps," or "brown poverty traps," caused by interactions between the impacts of climate change and increasing returns in the development of "clean-technology" sectors. A simple specification is used in which the economy can produce a single homogeneous consumption good with two different technologies. In the "old" sector, technology has global diminishing returns to scale and depends on the use of fossil energy that gives rise to long-lived, damaging climate change. In the "new" sector, the technology has convex-concave production and is not dependent on the polluting energy input. If the new sector does not grow fast enough to move through the phase of increasing returns, then the economy may linger at a low level of income indefinitely or it may achieve greater progress but then get driven back down to a lower level of income by environmental degradation. Stimulating growth in the new sector thus may be a key element for avoiding an environmental poverty trap and achieving higher, sustained income levels.