Technological Transition and Carbon Constraints Under Uncertainty

Abstract

Most of these ancillary benefits can be attributed to the simultaneous reduction of conventional air pollution and the corresponding reduction of human health risk. This paper is an attempt to examine the positive effects of climate policy on long-term economic growth. The paper considers a stylized economic growth model with two production technologies, one represents an “old” and another a “new” technological structure. Transition of an economy from an “old” to a “new” technological structure may generate non-concavity in the aggregated production function with local segments of increasing returns. Presence of increasing returns on macro level results in multiple equilibrium and in multiple steady states. Under some conditions climate policy may induce the transition of a low- or middle-income economy to a higher steady state, while in the absence of climate policy an economy may end up in a development trap. Climate policy uncertainties decrease the probability of an economy to converge to a higher steady state.