Directed technical change, unilateral actions, and climate change

In this paper, I investigate the implications of policy-induced technological change based on a multi-region variant of the directed technical change model developed by Acemoglu et al. (2012). On top of the pollution externality accompanied by carbon dioxide emission, different regions are connected through a global market where energy-related machine producing firms monopolistically compete with each other. One of the main findings of the analysis is that unilaterally introduced climate policies in developed regions might have only a slight short-term impact at a global level, but later will turn out to be a basis for low-carbon development in developing regions as well as developed regions. The simulation results indicate that an extension of the Kyoto protocol, if appropriately designed, can trigger a long-term shift in energy use at a global level even without active involvement of the United States. Moreover, if the United States decides to join the treaty and a fairly moderate abatement target is agreed upon among the member states, the similar level of long-term environmental consequence as in the universal climate regime can be replicated without explicit participation of developing regions.