A general equilibrium analysis of technological change to cope with environmental degradation affecting product prices

Adaptation is a natural way of responding to climate change's harmful impacts. As technological change plays a significant role in adaptation, this paper discusses the effects of change in technology by employing a general equilibrium (GE) model. A two-sector, two-factor, two-country general equilibrium model is developed to analyse the interaction among environmental policy, trade, and adaptation strategy of producers (technological change). The results suggest that any technological change for adapting to the climate change negatively affects the relative price of the final goods; therefore, a small open country will have comparative advantage to export its goods and services. However, an environmental policy of increasing emissions tax will decrease the country's exports. This study adds to the relevant literature by introducing one separate mitigation sector to the GE model to investigate both mitigation and adaptation as a solution to environmental degradation.