The Unilateral Implementation of a Sustainable Growth Path with - PowerPoint PPT Presentation

The Unilateral Implementation of a Sustainable Growth Path with Directed Technical Change Inge van den Bijgaart University of Gothenburg

Introduction & Motivation } Unilateral climate policy } EU emission trading scheme; California’s Global Warming Solutions Act; Germany’s Energiewende } Carbon leakage (Hoel, 1996; Babiker, 2005; Burniaux & Martins, 2012) à Static analysis, given technology (path) } Yet technological change is endogenous } Changes in structure of production affect innovation decisions

Introduction & Motivation } Unilateral climate policy } EU emission trading scheme; California’s Global Warming Solutions Act; Germany’s Energiewende } Carbon leakage (Hoel, 1996; Babiker, 2005; Burniaux & Martins, 2012) à Static analysis, given technology (path) } Yet technological change is endogenous } Effect of unilateral policy on innovation?

Introduction & Motivation A simple line of reasoning } Innovation is profit-driven } Unilateral policies (UP) cause carbon leakage à UP increase the size of polluting sectors in nonparticipating countries à UP encourage innovation in polluting sectors in these countries } Dynamic leakage: carbon leakage is worsened in the long run?

Introduction & Motivation A simple line of reasoning } Innovation is profit-driven } ‘Standard’ unilateral environmental policies (UP) cause carbon leakage à UP increase the size of polluting sectors in nonparticipating countries à UP encourage innovation in polluting sectors in these countries? } Dynamic leakage: carbon leakage is worsened in the long run?

Introduction & Motivation A simple line of reasoning } Innovation is profit-driven } ‘Standard’ unilateral environmental policies (UP) cause carbon leakage à UP increase the size of polluting sectors in nonparticipating countries à UP encourage innovation in polluting sectors in these countries } Dynamic leakage: carbon leakage is worsened in the long run? } Undermine long run sustainable growth?

Introduction & Motivation Research questions } (How) can unilateral policies implement sustainable growth? } When is growth sustainable? } How do unilateral policies affect production and innovation in nonparticipating countries? } Will a myopic social planner implement sustainable growth? } What (coalitions of) countries can implement sustainable growth?

Introduction & Motivation Research questions } (How) can unilateral policies implement sustainable growth? } When is growth sustainable? } How do unilateral policies affect production and innovation in nonparticipating countries? } Will a myopic social planner implement sustainable growth? } What (coalitions of) countries can implement sustainable growth?

Introduction & Motivation Research questions } (How) can unilateral policies implement sustainable growth? } When is growth sustainable? } How do unilateral policies affect production and innovation in nonparticipating countries? } Will a myopic social planner implement sustainable growth? } What (coalitions of) countries can implement sustainable growth?

Previous Literature } Directed technical change } Acemoglu (1998, 2002) } and the environment } Newell et al. (1999), Popp (2002), Aghion et al. (2012) } Jaffe et al. (2005), Gerlagh et al. (2009), Acemoglu et al. (2012) } DTC and unilateral env. policy } Golombek & Hoel (2004), Di Maria & Smulders (2005), Gerlagh & Kuik (2007), Di Maria & van der Werf (2008), Hemous (2012).

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Model overview } Preferences k ∈ h , f { } ( ) U kt = u Y kt + , E t + Y kt + ≡ Y kt , Y kt + 1 ,..., Y kt + ∞ { } ( ) = −∞ for ν ≥ t E ν → E u Y kt + , E t + lim E t + ≡ E t , E t + 1 ,..., E t + ∞ { } } Final output ε ε = el . of substitution ⎛ ⎞ ε − 1 ε − 1 ε − 1 ! Y kt = Y kct + Y ε ε ⎜ ⎟ ε > 1 → substitutes kdt ⎝ ⎠ } Intermediates production j ∈ c , d { } ! 1 ( ) , α + β < 1 α , β ∈ 0,1 1 − α − β ∫ 1 − α x a Y kjt = L kjt A jit kjit di 0 A hjit = A fjit = A jit } Machine production & profits Y kt = ! 1 ψ > 0 ∫ Y kt − ψ x kjit di 0 dd ( ) π kjit = x kjit p kjit − ψ p kt

Model overview } Intermediate goods market clearing, trade balance, labor market clearing  W ≡ Y hdt W + Y fdt Y W jt = Y W W Y dt jt ! W ≡ ! W + ! p ct Y kct −  ) + p dt Y kdt −  ( ( ) = 0 W Y kct Y kdt Y dt Y hdt Y fdt = + L L L k kct kdt } Environment W ,,..., ! W , ! ! W ≡ !  W { } ( ) Y dt − Y dt −∞ Y dt − 1 Y dt Y W E t + 1 = f dt − } Innovation tradeoff [ ] vs Ε π kdit [ ] Ε π kcit W ≡ s hjt + s fjt s jt } Growth 1 ∫ A jt ≡ A jit di ( ) A jt − 1 W A jt = 1 + γ zs jt 0 γ z > 0 } Scientist clearing = + s s s k kct kdt j

Policy tools } Intermediate input tax (consumption tax) } Intermediate output tax (production tax) } Innovation subsidy } All tools can be employed in both sectors } Assume the foreign country does not use any

Results Effects of unilateral policies on foreign } Unilateral policies affect foreign through the equilibrium world prices } If unilateral policies increase the equilibrium world price of dirty intermediates relative to clean foreign increases dirty output and becomes a dirty 1. intermediate exporter (static leakage) (Lemma 1) foreign scientists will have a greater incentive to innovate in 2. the dirty sector (dynamic leakage) (Lemma 2)

Results Effects of unilateral policies on foreign } Unilateral policies affect foreign through the equilibrium world prices } Suppose unilateral policies increase the equilibrium world price of dirty intermediates relative to clean foreign increases dirty output and becomes a dirty 1. intermediate exporter (static leakage) (Lemma 1) foreign scientists have a greater incentive to innovate in the 2. dirty sector (dynamic leakage) (Lemma 2)

Results Requirements for sustainable growth } Remember: ( ) = −∞ for ν ≥ t E ν → E u c kt + , E t + lim } Sustainable growth: for all ν E ν < E } Assumption: in laissez-faire, all innovation will be in dirty à dirty output will grow, so will the emission stock: unsustainable! à policy is needed to curb emission growth Sustainable growth requires (Lemma 3) } foreign to ‘voluntarily’ abandon dirty consumption growth } If clean and dirty inputs are good substitutes } If the clean input becomes sufficiently cheap relative to dirty } If more innovation in the clean than in the dirty sector W > s W s ct dt } sufficient room to manoeuvre (large ) E

Results Requirements for sustainable growth } Remember: ( ) = −∞ for ν ≥ t E ν → E u c kt + , E t + lim } Sustainable growth: for all ν E ν < E } Assumption: in laissez-faire, all innovation will be in dirty à dirty output will grow, so will the emission stock: unsustainable! à policy is needed to curb emission growth Sustainable growth requires (Lemma 3) } foreign to ‘voluntarily’ abandon dirty consumption growth } If clean and dirty inputs are good substitutes } If the clean input becomes sufficiently cheap relative to dirty W > s W } If more innovation in the clean than in the dirty sector s ct dt } sufficient room to maneuver (large ) E

Results Can home unilaterally implement sustainable growth? } Suppose we meet the substitutability requirement and E is large enough W > s W } How to implement s ct >s dt ? s ct dt } If s h >s f : easy, subsidize home scientists (Prop. 1) s h > s f } If s h =s f : need to redirect foreign scientists to the clean sector s h ≤ s f Implement policies that increase the price of clean intermediates à foreign expands its clean sector à encourages clean innovation in foreign } More likely feasible if ¨ Home represents a large share of global demand: large L h / L f ¨ The clean sector was already relatively large to begin with: large A c / A d (Prop. 2)