Debt, Growth, and the Carbon Lock-In

Despite decades of climate policy initiatives and significant advances in decarbonization efforts, global CO₂ emissions continue to rise, suggesting the influence of structural factors that counteract mitigation gains. Here, we identify financial leverage as a fundamental mechanism that underpins this persistent overshoot.

We build a stochastic macro-financial model that integrates credit dynamics, economic growth, bankruptcy risk, and cumulative carbon emissions. The model shows that growth driven by debt financing consistently increases cumulative emissions, thereby locking economies into high-carbon pathways despite reductions in emissions intensity. This arises from a double constraint: debt repayment requires sustained growth, while growth remains energy-dependent and thus generates emissions. When growth becomes increasingly dependent on leverage, financial instability and cumulative emissions rise, while gains in real wealth diminish, revealing a leverage frontier beyond which additional credit primarily generates risk.

Calibrating the model to multi-decade data for the United States, China, France, and Denmark, we find a robust coupling between debt accumulation, cumulative GDP, and cumulative emissions across distinct economic structures. These results challenge the feasibility of growth–emissions decoupling under prevailing credit-driven growth regimes and indicate that achieving net-zero targets requires aligning credit allocation with decarbonisation objectives.