Can International Technological Diffusion Substitute for Coordinated Global Policies to Mitigate Climate Change?

IMF Working Papers, June 25, 2021

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Main conclusion: International technological diffusion can substitute for coordinated global policies to mitigate climate change — "In short, yes."
Model used: multi-region integrated assessment model with fuel-specific endogenous technical change.
Core scenario outcome: When innovation can diffuse overseas, long-run temperature increases are limited to 3 degrees.
Counterfactual: Without international technological diffusion, Europe and China reducing emissions to zero by mid-century is insufficient to avoid catastrophic climate change.
Mechanism: Policy in emissions-reducing regions both encourages green innovations and dissuades dirty innovations that would otherwise spread.

Geographic focus: Europe and China reducing emissions to zero by mid-century.
Key model feature: fuel-specific endogenous technical change.
Diffusion scenarios:
- No international technological diffusion: insufficient mitigation; catastrophic climate change implied.
- With international technological diffusion: long-run temperature increases limited to 3 degrees.

Most effective package in emissions-reducing regions:
- Research subsidy funded by a carbon tax.
- Short-term effect: carbon tax directly alters the composition of energy.
- Longer-term effect: research subsidies induce innovation that further reduces emissions.
Ineffective policy:
- Green production subsidies are ineffective because they undermine incentives for innovation.

Subjects: Carbon tax, Climate policy, Environment, Financial sector policy and analysis, Greenhouse gas emissions, Spillovers, Taxes.
Keywords: Carbon tax, Climate policy, energy-producing firm, Europe, Global, green production subsidy, Greenhouse gas emissions, package in emissions-reducing region, policy package, research subsidy, Spillovers.