1. Unilateral Emission Reductions and Cross-Country Technology Spillovers Rolf Golombek and Michael Hoel 2004

2. What’s the question? Is “leakage” necessarily positive? Answer (in a nutshell): no, not if technologies are endogenous

3. The model Each country chooses abatement (a,A) and R&D expenditures (x,X) to minimize sum of abatement costs and env’l damages Assume BAU emissions are 1 for each country (thus global emissions are 2-a-A) Solve for equilibrium abatement and R&D expenditures in each country Conduct comparative statics, ask whether there is Leakage: a↑ while A↓ or Negative leakage: a↑ and A↑

4. Comparative Static Suppose one country---the high-concern country---experiences an increase in its environmental “awareness” – modeled as an upward pivot in its MD curve Responses – high-concern country responds by increasing own abatement (a↑) and own R&D (x↑)

5. What about the Low-concern country? a↑ lowers pollution suffered abroad – If marginal damage curve is upward sloping, the increase in a walks the low-concern country down/SW along its marginal damage curve – low-concern country will want to lower its marginal abatement costs accordingly x↑potentially raises the productivity of ROW spending on R&D – the high-concern country’s increase in R&D spending may raise the productivity of the other country’s R&D spending, making ROW R&D spending more attractive

6. Which dominates? If MD relatively flat and R&D spillovers are strong, then increased R&D and abatement in high-concern country matched by more abatement in low-concern country

7. Take home point With endogenous technologies and technology spillovers, leakage isn’t a certainty, even with convex damage curves.

8. Other versions of Negative Leakage Copeland & Taylor (2005) income effects from terms of trade improvement induce higher pollution taxes abroad Chua (2003) – carbon tax in one sector raises that sector’s demand for the factor used relatively intensively in abatement – draws resources out of the clean sector – clean sector contracts – Implication: When the clean sector contracts in policy-active country, this raises world relative price of clean goods, inducing ROW to shift out of dirty good production

9. Fullerton, Karney & Baylis 2011 “Negative Leakage” two final goods X and Y two inputs: – K : fixed supply, mobile between sectors – C (carbon): infinite supply at exogenously determined, distinct prices for each sector K and C are imperfect substitutes in production – σ i measures elasticity of substitution in production of good i X and Y are imperfect substitutes in consumption

10. What constitutes Negative Leakage in their model? Suppose have a closed economy with two dirty goods Suppose tax carbon emissions in only one of those two sectors What does a tax on Y’s use of carbon do to emissions from sector X? If C Y ↓ is matched by C X ↓, this constitutes “negative leakage”

11. Note: model/results extend to international trade if think of one country producing only X, another producing only Y, and capital being perfectly mobile between the two

12. Three effects of a carbon tax in sector Y 1.income and substitution effects in consumption – even if remove capital from model, will see negative leakage if elasticity of substitution between Y and X is < 1 carbon tax in Y sector raises price of good Y consumers really like good Y buy less X so as to finance Y sector purchases 2.revenue rebates Fullerton, Karney & Baylis 2011 “Negative Leakage” continued

13. 3. Abatement Resource Effect (ARE) carbon taxes induce dirty industries to seek out cleaner inputs, which draws away resources from other sectors, reducing their use of complementary inputs (emissions) in the process Fullerton, Karney & Baylis 2011 “Negative Leakage” continued

14. ARE Case a: σ y >1>σ x taxed sector easily substitutes away from carbon to capital – p K bid up untaxed sector can’t easily substitute away from capital – X sector contracts – C X falls Fullerton, Karney & Baylis 2011 “Negative Leakage” continued

15. ARE Case b: σ y <1<σ x taxed sector can’t substitute way from carbon – contracting Y sector releases capital – p k falls X sector substitutes away from carbon – C X falls Fullerton, Karney & Baylis 2011 “Negative Leakage” continued