Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Nota di Lavoro ; No. 94.2006

Classification and Topics

• Classification: Wirtschaft ; Trade and Environment ; Technological Change: Choices and Consequences; Diffusion Processes ; Climate; Natural Disasters and Their Management; Global Warming ; Environmental Economics: Technological Innovation
• Subject: Climate Policy ; Carbon Leakage ; Directed Technical Change ; International Trade ; Klimaschutz ; Kohlendioxid ; Internationale Umweltpolitik ; Internationale Wirtschaftsbeziehungen ; Technischer Fortschritt ; Umweltökonomik ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Di Maria, Corrado ; van der Werf, Edwin
• Event: Veröffentlichung
• (who): Fondazione Eni Enrico Mattei (FEEM)
• (where): Milano
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/74310
• Last update: 10.03.2025, 11:42 AM CET