Carbon leakage revisited: unilateral climate policy with directed technical change

Corrado di Maria and Edwin van der Werf ()

No 68, Discussion Paper from Tilburg University, Center for Economic Research

Abstract: The increase in carbondioxide emissions by some countries in reaction to an emission reduction by countries with climate policy (carbon leakage) is seen as a serious threat to unilateral climate policy. Using a two-country model where only one of the countries enforces an exogenous cap on emissions, this paper analyzes the effect of technical change that can be directed towards the clean or dirty input, on carbon leakage. We show that, as long as technical change cannot be directed, there will always be carbon leakage through the standard terms-of-trade effect. However, once we allow for directed technical change, a counterbalancing induced technology effect arises and carbon leakage will generally be lower. Moreover, we show that when the relative demand for energy is sufficiently elastic, carbon leakage may be negative: the technology effect induces the unconstrained region to voluntarily reduce its own emissions.

Keywords: carbon leakage; directed technical change (search for similar items in EconPapers)
JEL-codes: F18 O33 Q54 Q55 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene and nep-env
Date: Written 2005
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Related works:
Working Paper: Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change (2006)
Journal Article: Carbon leakage revisited: unilateral climate policy with directed technical change (2008)
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