Low-carbon development through international specialization : conference paper

A major concern in climate negotiations is that decarbonization may significantly hurt the development process. This paper shows that international specialization can contribute to making environmental and economic objectives compatible. When carbon efficiency differs between two trading partners, environmental policy affects production cost differentially, so that the comparative advantage in technology is endogenous. Under a global climate agreement, a universal carbon tax would shift the production of energy intensive goods towards carbon efficient economies. Once emissions are correctly internalized, trade becomes unambiguously beneficial for the environment and allows pursuing both environmental objectives and fast economic growth. Even in the absence of a climate agreement, free trade provides the option of indirectly accessing carbon efficient technology abroad. This improves the marginal rate of substitution between consumption and environmental quality and thus achieves emission reductions even without international cooperation.