Is Clean Development Always Possible? The Role of Environmental Policy in Developing Countries in the Presence of Aggregate Demand Spillovers[Le développement propre est-il toujours possible ? Le rôle de la politique environnementale dans les pays en développement en présence de débordements de la demande globale]

This paper investigates whether economic development is impeded by binding national emission standards to control climate change. We develop a simple model to highlight the potential role of environmental policy for successful clean development in the presence of aggregate demand spillovers in line with the paper by Murphy, Shleifer and Vishny (1989). We consider emissions standards but also discuss the potential of a tax-subsidy scheme and international monetary transfers to achieve (or not) clean development. In theory, clean development depends on both the microeconomic conditions related to technology choice and the macroeconomic conditions related to satisfaction of aggregate demand effects. The model builds on two main assumptions: the presence of fixed costs which give rise to increasing returns to scale in production, and clean technology. We also discuss practical employment of these environmental policies by three middle income countries which experienced declining emissions to GDP ratios as their GDP increased.