20210624-IMF-Can_International_Technological_Diffusion_Substitute_for_Coordinated_Global_Policies_to_Mitigate_Climate_Change_76页_1mb

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

Core Question

This paper examines whether technological diffusion from climate mitigation policies in major emitters could substitute for full global policy coordination to limit climate change, assuming countries like China and OECD Europe reduce emissions to near zero by mid-century.

Core Finding: Yes, with Caveats

Yes, under plausible policy implementations in China and OECD Europe (combining revenue-neutral carbon taxes and R&D subsidies), one internal adjustment is sufficiently tight to deliver consistent climate benefits via international technological spillovers. The climate response to unilateral climate action by the leading developing nation and the leading developed region is large and material enough to avert the catastrophic spiraling of climate change that would occur absent technological spillovers. International technological diffusion appears dimensionally significant enough that it could lower the cost of climate policies globally to such a degree as to render climate agreements considerably more plausible and stable than would otherwise be the case.

Key Points

• Substitution Effect: Emissions reductions by major emitters through climate policies have two channels: direct (within-regions) and indirect (via technological spillovers). The spillover effect is numerically substantial, reducing long-run global temperature increases to about 3°C above pre-industrial norms compared to over 7°C without diffusion.
• Dominant Mechanism: Policy-induced dissatisfaction with so-called "dirty" technology incentivizes innovation discouraging its development elsewhere, acting as a vital disincentive. Without international technological diffusion, the effect of prompt, large-scale climate policies is confined entirely within the "carbon club" of advanced and large developing countries. With it, policies discourage green technology development in the rest of the world.
• Policy Effect Size: Achieving emission reductions requires relatively modest average carbon taxes at the peak phase-out year ($100 per ton CO~2~) fueled by research subsidies. The effective international spillover effect is comparable in magnitude to the direct effect of a carbon tax.
• Implementation Conditions: The findings hold under a rich general equilibrium framework reflecting key empirical regularities in the data regarding the R&D system, resource constraints, and energy markets. Sensitivity analysis indicates outcomes are robust across a range of reasonable parameter values reflecting alternative theoretical perspectives and supporting model specifications.
• Policy Mix Importance: Research subsidies (R&D) are roughly three times more effective than production subsidies (e incentive) over the transition period because they generate much stronger induced technical change (dynamic) effects alongside static composition adjustments.
• Indirect Mechanisms: Intra-industry technological spillovers slow the pace of long-run adjustment and slightly dampen carbon tax impacts. However, the overall substitutability effect appears large enough to warrant serious consideration.
• Climate Goal Achievement: Global temperature stability at (or about) 2°C could be attained via substitution mechanisms, representing a meaningful step toward the long-term climate mitigation goal under plausible implementation.
• Strategic Implications: While global cooperation remains the preferred approach, international technological diffusion can partially substitute for it. Strategies leveraging this substitutability might increase the appeal of individual climate action and enhance the long-term stability of international agreements.

Conclusion

The paper finds that technological diffusion arising from successful climate mitigation policies constitutes a numerically significant partial substitute for international coordination. While full cooperation is still the first-best approach, the existence of substantial partial substitutability is an important finding, as it suggests that unilateral climate action by major emitting regions could play a vital role in limiting the dangerous effects of climate change.