DP9733 Environmental Policy and Directed Technical Change in a Global Economy: The Dynamic Impact of Unilateral Environmental Policies

Author(s): David Hémous
Publication Date: November 2013
Keyword(s): climate change, directed technical change, environment, innovation, trade, unilateral policy
JEL(s): F18, F42, F43, O32, O33, O41, Q54, Q55
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9733

This paper builds a two-country (North, South), two-sector (polluting, nonpolluting) trade model with directed technical change, examining whether unilateral environmental policies can ensure sustainable growth. The polluting good is produced with a clean and a dirty input. I show that a temporary Northern policy combining clean research subsidies and a trade tax can ensure sustainable growth but Northern carbon taxes alone cannot. Trade and directed technical change accelerate environmental degradation either under laissez-faire or if the North implements carbon taxes, yet both help reduce environmental degradation under the appropriate unilateral policy. I characterize the optimal unilateral policy analytically and numerically using calibrated simulations.