Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change
AbstractA common critique to the Kyoto Protocol is that the reduction in emissions of CO2 by countries who comply with it will be (partly) offset by the increase in emissions on the part of other countries (carbon leakage). This paper analyzes the effect of technical change on carbon leakage in a two-country model where only one of the countries enforces an exogenous cap on emissions. Climate policy induces changes in relative prices, which cause carbon leakage through a terms-of-trade effect. However, these changes in relative prices in addition affect the incentives to innovate in different sectors. We allow entrepreneurs to choose the sector for which they innovate (directed technical change). This leads to a counterbalancing induced-technology effect, which always reduces carbon leakage. We therefore conclude that the leakage rates reported in the literature so far may be too high, as these estimates neglect the effect of relative price changes on the incentives to innovate.
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Bibliographic InfoPaper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.94.
Date of creation: Jun 2006
Date of revision:
Climate Policy; Carbon Leakage; Directed Technical Change; International Trade;
Other versions of this item:
- Corrado Maria & Edwin Werf, 2008. "Carbon leakage revisited: unilateral climate policy with directed technical change," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 39(2), pages 55-74, February.
- Di Maria, C. & Werf, E.H. van der, 2005. "Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change," Discussion Paper 2005-68, Tilburg University, Center for Economic Research.
- F18 - International Economics - - Trade - - - Trade and Environment
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
- Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters
- Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
This paper has been announced in the following NEP Reports:
- NEP-AGR-2006-07-21 (Agricultural Economics)
- NEP-ALL-2006-07-21 (All new papers)
- NEP-ENE-2006-07-21 (Energy Economics)
- NEP-ENV-2006-07-21 (Environmental Economics)
- NEP-INT-2006-07-21 (International Trade)
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