Buy Coal or Kick-Start Green Innovation? Energy Policies in an Open Economy
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Buy Coal or Kick‑Start Green Innovation? Energy Policies in an Open Economy Chiara Ravetti1 · Tania Theoduloz2 · Giulia Valacchi3 Accepted: 8 July 2020 © The Author(s) 2020
Abstract This paper analyses two unilateral policies available to countries that want to rapidly curb carbon emissions in the global economy, but do not own any fossil fuel resources. If fossil fuel owners do not cooperate in CO2 emission reduction efforts, the only strategy to reduce their fossil fuels’ use is to exploit the interconnectedness of production given by international trade. We compare a Pigouvian approach, namely a subsidy for renewable energy prices, and a Coasian supply-side strategy, buying extractive rights over fossil fuel deposits abroad. Using a dynamic North–South trade model with endogenous innovation, we show how these policies, designed to prevent an environmental disaster, have different cost and welfare profiles. If fossil fuel deposits can be purchased at their market price, the supply-side policy achieves the highest welfare. If instead the fossil fuel owners require a full compensation for their income loss, subsidies for renewable energy inputs can result in higher welfare, but only if the resource-rich region has less advanced technologies for green energy production than the countries implementing the policy. Keywords Energy · Trade · Fossil fuels · Directed technical change · Supply-side policies JEL Classification F18 · O32 · O38
A previous version of the paper circulated with the title “Energy, trade and innovation: the tragedy of the locals”. The research leading to these results was partly funded by the Swiss National Science Foundation under the Swiss South African Joint Research Programme (SSAJRP), project n 149087. We are grateful to an anonymous referee for exceptional comments on the manuscript. We thank Rick Van der Ploeg, Sjak Smulders, Tony Venables, Corrado Di Maria, Zhong Xiang Zhang, Andrea Valente, Joelle Noailly, Cees Withagen, Mare Sarr, Alex Schmitt, Wessel Vermeulen, Gerhard Toews, Inge van den Bijgaart and Tim Swanson for insightful feedback about the model. Tania Theoduloz acknowledges that this article is part of her dissertation for the Phd programme of Universidad Catolica de Argentina. Chiara Ravetti acknowledges financial support from the individual SNF Mobility Fellowship N. 161604. All errors remain ours. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1064 0-020-00455-8) contains supplementary material, which is available to authorized users. * Chiara Ravetti [email protected] Extended author information available on the last page of the article
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1 Introduction Sustainable development is one of the key challenges for the future of the world economy. Currently, most productive activities rely upon energy from fossil fuels, with unsustainable damage to the global environment. Climate scientists estimate that a large fraction of fossil fuel reserves—as much as 80% of coal depos
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