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Buy Coal or Kick-Start Green Innovation? Energy Policies in an Open Economy

Author

Listed:
  • Chiara Ravetti

    (Politecnico di Torino)

  • Tania Theoduloz

    (Universidad Catolica de Argentina)

  • Giulia Valacchi

    (Maison de la Paix)

Abstract

This paper analyses two unilateral policies available to countries that want to rapidly curb carbon emissions in the global economy, but do not own any fossil fuel resources. If fossil fuel owners do not cooperate in $$\hbox {CO}_2$$ CO 2 emission reduction efforts, the only strategy to reduce their fossil fuels’ use is to exploit the interconnectedness of production given by international trade. We compare a Pigouvian approach, namely a subsidy for renewable energy prices, and a Coasian supply-side strategy, buying extractive rights over fossil fuel deposits abroad. Using a dynamic North–South trade model with endogenous innovation, we show how these policies, designed to prevent an environmental disaster, have different cost and welfare profiles. If fossil fuel deposits can be purchased at their market price, the supply-side policy achieves the highest welfare. If instead the fossil fuel owners require a full compensation for their income loss, subsidies for renewable energy inputs can result in higher welfare, but only if the resource-rich region has less advanced technologies for green energy production than the countries implementing the policy.

Suggested Citation

  • Chiara Ravetti & Tania Theoduloz & Giulia Valacchi, 2020. "Buy Coal or Kick-Start Green Innovation? Energy Policies in an Open Economy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 77(1), pages 95-126, September.
  • Handle: RePEc:kap:enreec:v:77:y:2020:i:1:d:10.1007_s10640-020-00455-8
    DOI: 10.1007/s10640-020-00455-8
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    More about this item

    Keywords

    Energy; Trade; Fossil fuels; Directed technical change; Supply-side policies;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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