Learning by Doing and Strategic Interaction in Environmental Policies in a Two-country Model

This paper considers the impact of differences in endogenous technological change between two countries on global pollution emissions under international strategic interaction in environmental policies. A country that initially has a dirty technology (an environmentally lagging country) reduces more pollution emissions by imposing a higher rate of pollution reduction per unit of the emission, although it may generate larger total emissions. The more a country reduces pollutants, the more it learns how to produce in an environmentally friendly manner at low cost. The main finding is that an environmentally lagging country's technology may continue to advance through a learning-by-doing effect until it exceeds the environmental friendliness of a leading country that initially had the cleanest technology. Whether a country eventually becomes an environmentally leading country depends on the country size and its awareness of environmental quality.