Conference Agenda

This paper studies climate policy and economic growth in a fragmented world economy in which countries adopt divergent environmental strategies. The model distinguishes between a proactive group implementing stringent climate policies and a lagging group refraining from mitigation because of perceived economic costs. A policy tipping mechanism arises when the economic performance of the proactive group overtakes that of the laggards, inducing the latter to adopt comparable climate measures. Using a macroeconomic growth model with endogenous innovation and energy transition dynamics, I show that policy tipping has large effects on global emissions but comparatively moderate effects on economic growth. The timing of the policy shift depends critically on policy design and technological progress. In a divided world, support for clean-energy innovation can outperform carbon pricing in accelerating global decarbonization because it induces earlier policy convergence across country groups. Achieving internationally agreed climate targets therefore requires proactive countries to combine ambitious emissions reductions with sustained economic performance, supported by an efficient mix of carbon pricing and innovation subsidies.