The Unilateral Implementation of a Sustainable Growth Path with Directed Technical Change

Abstract

We determine the core characteristics of a climate coalition's optimal policies in a dynamic twocountry directed technical change framework. Unilateral policies alter the structure of production and thereby innovation incentives across countries. Whenever feasible, optimal policies implement sustainable growth by directing global innovation to the nonpolluting sector. If nonparticipants drive global innovation, this requires policies relocating clean production to nonparticipants. A calibration exercise suggests that the US or EU alone are too small to implement sustainable growth. A coalition of Annex I countries that signed the Kyoto protocol can implement sustainable growth, yet required tax rates are very high.

Environmental Policy and the Direction of Technical Change

“…() discuss parameter choices related to the climate part of the model; Mattauch et al . () add learning‐by‐doing effects to the framework; Durmaz and Schroyen () extend the model by adding abatement technology (carbon capture and storage); and Hémous () and van den Bijgaart () extend the model to include more than one country and analyse unilateral environmental policies in a global context. Importantly, none of these papers explores profits from innovations that are retained until replaced by a better innovation, meaning that future emission policies affect innovation decisions today.…”