Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change

Corrado Di Maria and Edwin van der Werf

No 12056, Climate Change Modelling and Policy Working Papers from Fondazione Eni Enrico Mattei (FEEM)

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.

Keywords: Environmental; Economics; and; Policy (search for similar items in EconPapers)
Pages: 23
Date: 2006
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https://ageconsearch.umn.edu/record/12056/files/wp060094.pdf (application/pdf)

Related works:
Working Paper: Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change (2006)
Working Paper: Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change (2005)
Working Paper: Carbon Leakage Revisited: Unilateral Climate Policy with Directed Technical Change (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:feemcc:12056

DOI: 10.22004/ag.econ.12056

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