Climate Policy and Trade in Polluting Technologies

This paper studies international trade in equipment used in the combustion of fossil fuels. Informed by a theoretical analysis, we identify a type of technology leakage hitherto unexplored in the literature: a country’s export of combustion equipment tends to increase, all else equal, in the stringency of its climate policy. We test this prediction by estimating the impact of carbon pricing on international trade in combustion equipment using detailed data on bilateral trade and domestic carbon prices for the period 1995–2021. Our estimates reveal a robust positive association between the stringency of climate policies and exports of combustion equipment, providing clear evidence for the existence of technology leakage. We argue that standard policies to mitigate carbon leakage are unlikely to prevent technology leakage, raising novel policy questions.