Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/74310
Authors: 
Di Maria, Corrado
van der Werf, Edwin
Year of Publication: 
2006
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 94.2006
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.
Subjects: 
Climate Policy
Carbon Leakage
Directed Technical Change
International Trade
JEL: 
F18
O33
Q54
Q55
Document Type: 
Working Paper

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