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 hbox {CO}_2 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.
Highlights
Sustainable development is one of the key challenges for the future of the world economy
We compare two unilateral policies that can promptly address fossil fuels’ use in an open economy. These policies consist of a “pigouvian” solution, acting on the world price of renewable energy, and a “Coasian” supply-side solution, creating a market for fossil fuel deposits to prevent their exploitation. Both policies rely on the interconnectedness of the global economy to redirect the path of production and innovation: since energy inputs are traded, the North can foster its competitiveness in renewables with a price subsidy, or stop the leading source of comparative advantage in the production of fossil fuels by purchasing extractive rights over carbon deposits in the South
Similar to Hémous, we model two regions connected by international trade, North and South, and assume that the South does not cooperate in the fight against climate change, so that a global carbon tax is not feasible
Summary
Sustainable development is one of the key challenges for the future of the world economy. These policies consist of a “pigouvian” solution, acting on the world price of renewable energy, and a “Coasian” supply-side solution, creating a market for fossil fuel deposits to prevent their exploitation Both policies rely on the interconnectedness of the global economy to redirect the path of production and innovation: since energy inputs are traded, the North can foster its competitiveness in renewables with a price subsidy, or stop the leading source of comparative advantage in the production of fossil fuels by purchasing extractive rights over carbon deposits in the South. Both interventions immediately reverse the process of environmental degradation, but the costs of the two policies can vary substantially depending on the characteristics of the countries involved. Each economy specializes and trades according to relative factor abundance (à la Heckscher–Ohlin) and its relative technological productivity (with a Ricardian mechanism)
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