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Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change

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Author Info
Corrado Di Maria (CentER and Tilburg University)
Edwin van der Werf (CentER and Tilburg University)

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Abstract

A 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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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2006.94.

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Date of creation: Jun 2006
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Handle: RePEc:fem:femwpa:2006.94

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Related research
Keywords: Climate Policy; Carbon Leakage; Directed Technical Change; International Trade;

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Find related papers by JEL classification:
F18 - International Economics - - Trade - - - Trade and Environment
O33 - Economic Development, Technological Change, and Growth - - Technological Change - - - 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

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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  5. Jean-Marc Burniaux & Joaquim Oliveira Martins, 2000. "Carbon Emission Leakages: A General Equilibrium View," OECD Economics Department Working Papers 242, OECD, Economics Department. [Downloadable!]
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  13. Acemoglu, Daron, 2002. "Directed Technical Change," Review of Economic Studies, Blackwell Publishing, vol. 69(4), pages 781-809, October.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gilbert Metcalf & David Weisbach, 2008. "The Design of a Carbon Tax," Discussion Papers Series, Department of Economics, Tufts University 0727, Department of Economics, Tufts University. [Downloadable!]
    Other versions:
  2. Larson, Donald F. & Ambrosi, Philippe & Dinar, Ariel & Rahman, Shaikh Mahfuzur & Entler, Rebecca, 2008. "Carbon markets, institutions, policies, and research," Policy Research Working Paper Series 4761, The World Bank. [Downloadable!]
  3. Reyer Gerlagh & Onno Kuik, 2007. "Carbon Leakage with International Technology Spillovers," Working Papers 2007.33, Fondazione Eni Enrico Mattei. [Downloadable!]
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