Researchers Silvia Montagnania, Barnabe Ledoux, and David Lacoste, affiliated with the University of Grenoble Alpes and the Grenoble Institute of Political Studies, have published a study that explores the intricate relationship between credit dynamics, economic growth, and carbon emissions. Their work, titled “Debt, Growth, and the Carbon Lock-In,” was published in the journal Nature Communications.
The study introduces a macro-financial model that builds upon Kelly’s model, a framework rooted in information theory and investment theory. This model is used to understand the interplay between financial dynamics and climate change. Unlike traditional Integrated Assessment Models (IAMs), this approach explicitly links financial dynamics to cumulative emissions, allowing for an evaluation of how well policies align with net-zero emission targets.
The researchers found that introducing debt into the system can boost short-term production gains. However, this comes with increased bankruptcy risk and higher cumulative emissions. This dual challenge highlights a critical issue: financially, debt necessitates economic growth to be repaid, while ecologically, growth demands energy and consequently leads to emissions. When the intrinsic growth rate falls below the interest rate, the probability of solvency drops to zero, pushing the economy into a zone of structural instability.
The model identifies an optimal leverage frontier, beyond which additional debt does not fuel real wealth but instead increases the risk of bankruptcy and carbon debt. The study is calibrated using multi-decade macroeconomic and emissions data from several countries, including the United States, China, France, and Denmark. The results consistently show a strong correlation between cumulative debt, cumulative GDP, and cumulative emissions, regardless of the political structure of credit.
For the energy sector, this research underscores the importance of balancing economic growth with sustainable practices. As credit expansion amplifies GDP growth and associated emissions, the study suggests that current financial systems may inadvertently lock economies into higher cumulative carbon trajectories. Despite improvements in energy efficiency through innovation, the underlying financial dynamics pose a significant challenge to achieving net-zero emissions. The findings highlight the need for policies that decouple economic growth from carbon emissions, ensuring a more sustainable and stable financial future.
This article is based on research available at arXiv.