Carbon leakage revisited: Unilateral climate policy with directed technical change

Corrado Di Maria, E. Van Der Werf

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94 Citations (Scopus)


Using a stylized theoretical model, we argue that current economic analyses of climate policy tend to over-estimate the degree of carbon leakage, as they abstract from the effects of induced technological change. We analyse carbon leakage in a two-country model with directed technical change, where only one of the countries enforces an exogenous cap on emissions. Climate policy induces changes in relative prices, that cause carbon leakage through a terms-of-trade effect. However, these changes in relative prices also affect the incentives to innovate in different sectors. This leads to a counterbalancing induced-technology effect, which always reduces carbon leakage. We therefore conclude that the leakage rates reported in the literature may be too high, as these estimates neglect the effect of price changes on the incentives to innovate.
Original languageEnglish
Pages (from-to)55-74
Number of pages20
JournalEnvironmental and Resource Economics
Issue number2
Publication statusPublished - 1 Feb 2008


  • Climate Policy
  • Carbon Leakage
  • Directed Technical Change
  • International Trade
  • F18
  • O33
  • Q54
  • Q55

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