Next they study the case where the rate of

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Unformatted text preview: , as resource owners save interest costs by beginning with the sites that are more easily accessible. Presumably, however, there will never be a point when extraction costs overtake product prices – or even come near them. An environmental policy based upon pushing prices below production costs would need a big hammer. Marginal measures as those currently in force are plainly insufficient for that purpose. 318 Oil DDW 2012 1 No Leakage – Technology Solves 319 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Technology improvements means unilateral emissions reductions spillover van der Werf, Wageningen University, and Di Maria, Senior Lecturer in the Department of Economics at the University of Birmingham, 11 Edwin van der Werf, Wageningen University, and Corrado Di Maria, Senior Lecturer in the Department of Economics at the University of Birmingham, 5-11, [“Unintended detrimental effects of environmental policy: The green paradox and beyond,” CESIFO WORKING PAPER NO. 3466 CATEGORY 10: ENERGY AND CLIMATE ECONOMICS, abstract_id=1855899] E. Liu The fifth and most recent channel through which emissions by non-abating countries are affected after an emission reduction in other countries is through technology spillovers. Inspired by the literature on endogenous technological change (see e.g. Romer, 1990, Acemoglu, 2002), a literature on the effects of technological change and knowledge spillovers on (the costs of) climate policy has developed. However, only few papers brought this dimension into the discussion regarding carbon leakage. Golombek and Hoel (2004) introduce knowledge spillovers in a static analytical model where two countries have to decide how much to abate and how much to invest in R&D. By assumption, this investment reduces abatement costs. An exogenous fraction of R&D expenditures spills over to the other country. They show that under several model specifications it is possible that in response to increase in abatement in one country (due to greener preferences), abatement in the other country may increase as well, i.e. leakage may be negative. Whereas in Golombek and Hoel (2004) R&D expenditures are beneficial for the environment by assumption, Di Maria and Van der Werf (2008) endogenize the nature of technological change. They use a dynamic analytical 2-region 2-sector model where both countries are technologically developed and have fully enforced intellectual property rights, but only one region has a cap on emissions (for example the EU vs. the US). Knowledge developed in one country fully spills over to the other as firms in each country can buy licenses to use blueprints developed in the other country. One sector emits carbon dioxide in its production process while the other is clean, and thetwogoodsareusedasaninputforafinalgood throughaCESproductionfunction. Intheirfirst model, both sectors have the same (endogenous) rate of technological change and a tightening of theunilateralemissions capinducesanincreaseinemissionsbytheotherregion(carbonleakage) through a terms of trade effect, but global emissions decrease. Next they study the case where the rate of technological change can differ endogenously between sectors. That is, investors can decide whether to invest in blueprints in one sector or the other (directed technical change). The tightening of the cap in the abating country decreases the size of the energy-intensive sector and hence the market for energy-complementing innovations, but at the same time this increases the price of energy. Th...
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