Energy, trade and innovation: the tragedy of the locals

Chiara Ravetti, Tania Theoduloz and Giulia Valacchi

No 41-2016, CIES Research Paper series from Centre for International Environmental Studies, The Graduate Institute

Abstract: This paper analyses the use of different energy sources in a dynamic trade model with endogenous innovation. We consider two countries, North and South, the first with high environmental concerns and the second endowed with abundant fossil fuel resources. In this asymmetric setting, the South specializes in energy production using fossil fuels, causing local and global environmental damages. The North, instead, specializes in other manufacturing and imports energy inputs from the South. Endogenous innovation reinforces this pattern of specialization over time. We show that the North can unilaterally stop the use of fossil fuels and avoid a global climate disaster with two different strategies: either redirecting the comparative advantage of the South towards manufacturing, relocating the production of energy to the North, or buying fossil fuel deposits in the South. These two policies have different implications in terms of monetary costs and environmental outcomes for the North. The choice between the two depends on the valuation of the environment, the energy requirements of final goods’ production, the starting time of the policy and the time preferences of the North. Overall, however, there is no costless way for the North to stop unilaterally the use of fossil fuels.

Keywords: Energy; technical change; international trade; comparative advantage; fossil fuels. (search for similar items in EconPapers)
JEL-codes: F18 O32 O38 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2016-01-20
New Economics Papers: this item is included in nep-ene, nep-env and nep-ino
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Persistent link: https://EconPapers.repec.org/RePEc:gii:ciesrp:cies_rp_41

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