North-South diffusion of climate-mitigation technologies: the crowding-out effect on relocation

The deployment of cleaner production technologies is supposed to be crucial to mitigate the effect of climate change. The diffusion of technology from developed to developing countries can be done through different channels. It can be a business decision such as firms' relocation, opening of a subsidiary or the adoption of technology by southern firms, or it may be decided at the government level. This paper investigates, in a two-country model (North and South), the relationship between the diffusion of mitigation technologies, firms' relocation and the environment. We assume that both countries implement a carbon tax and there are two kinds of production technology used: a relatively clean technology and a dirty one. This paper theoretically shows that the technology diffusion by technology adoption, public transfer or subsidiary creation induces a decrease in relocation, while technology diffusion via purchasing dirty southern firms may increase the number of relocated firms. The paper also demonstrates that technology diffusion may have perverse effects in the long run. Indeed, total emissions may increase with technology diffusion since southern firms become more competitive.