Can China Harness Globalization to Reap Carbon Savings? Modeling International Technology Diffusion in a Multi-region Framework

This paper examines the effect of globalization, particularly international technology diffusion (TD), on China's domestic carbon savings. Building on a multi-region numerical model, this study considers both indigenous R&D and foreign TD as two sources of endogenous TC for domestic carbon savings. The model systematically describes foreign TD through three diffusion channels of trade, foreign direct investment (FDI) and disembodied spillovers, with an elaborate treatment on local knowledge absorptive capacity. Simulation results show that: (1) Foreign TD complements China's indigenous R&D to help reduce domestic carbon emissions, with the leading diffusion channel being disembodied spillovers in the short run and embodied diffusion (via import and FDI) in the long run; (2) Trade and FDI liberalization (economic globalization) facilitates economic integration and production growth, yet at the cost of higher emissions levels without carbon savings (scale effect); (3) Removal of foreign TD barriers (knowledge globalization) acquires the benefits of domestic carbon savings (technique effect); (4) Domestic climate regulation create the composition effect by inducing indigenous R&D and foreign TD to shift economic composition, hence helping partially mitigate climate compliance cost.