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Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change

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  • Di Maria, Corrado
  • van der Werf, Edwin

Abstract

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.

Suggested Citation

  • Di Maria, Corrado & van der Werf, Edwin, 2006. "Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change," Climate Change Modelling and Policy Working Papers 12056, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemcc:12056
    DOI: 10.22004/ag.econ.12056
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    More about this item

    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation

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