TECHNOLOGY TRANSFERS FOR CLIMATE CHANGE

• Date: 01 August 2016
• Published date: 01 August 2016
• DOI: http://doi.org/10.1111/iere.12185

INTERNATIONAL ECONOMIC REVIEW

Vol. 57, No. 3, August 2016

TECHNOLOGY TRANSFERS FOR CLIMATE CHANGE∗

BYMAY ELSAYYAD AND FLORIAN MORATH1

Max Planck Institute for Tax Law and Public Finance and Munich Graduate School of

Economics, Germany; Goethe University Frankfurt and Max Planck Institute for Tax Law and

Public Finance, Germany

This article considers the transfer of cost-reducing technology in the context of contributions to climate protection.

We analyze a two-period public goods model where later contributions can be based on better information, but delaying

the mitigation effort is costly because of irreversible damages. Investments in technology affect the countries’ timing

of contributing. We show that countries have an incentive to provide cost-reducing technology as this can lead to an

earlier contribution of other countries and can therefore reduce a country’s burden of contributing to the public good.

Our results provide a rationale for the support of technology sharing initiatives.

1. INTRODUCTION

Getting countries to commit to new post-Kyoto binding CO2emission reduction targets has

hitherto remained an elusive goal. A continued success on an international scale, however, has

been the support of renewable technology initiatives. For example, the Canc ´

un Summit in 2011

declared the start of a $1 billion new initiative and fund for the exchange of climate change

technology. Technology transfer mechanisms have always been a dimension of climate change

agreements. Article 4.5 of the United Nations Framework Convention on Climate

Change states that countries “shall take all practicable steps to promote, facilitate and f‌inance,

as appropriate, the transfer of, or access to, environmentally sound technologies and know-how

to other Parties.”2In fact, recent studies tracking the development of clean technologies show

their steady and persistent rise (see, for instance, UNEP, 2011).

This development is not surprising, given the strong national policies in support of renew-

able technologies that are being implemented, most notably, by the United States and the

European Union.3However, this support is often controversially debated. Investments in tech-

nology can be prof‌itable if they are perceived as investments in new markets. But in the public

good framework of environmental protection, a particularly persistent argument has been that

unilateral investments in technology hurt the investing country, as other countries can reduce

their effort on climate protection in return.4Given the strong international support for tech-

nology sharing initiatives, this article provides an argument in favor of sharing cost-reducing

∗Manuscript received March 2014; revised February 2015.

1We thank Reyer Gerlagh, B˚

ard Harstad, Kai Konrad, Johannes M¨

unster, Karen Pittel, Salmai Qari, Monika

Schnitzer, Jan-Peter Siedlarek, Marcel Thum, participants of the ESI Workshop in Munich, the SFB conference in

Caputh 2012, the APET Conference in Lisbon 2013, the IIPF Congress 2013, the CESifo Area Conference on Energy

and Climate Economics 2013, the Annual Congress of the Verein f¨

ur Socialpolitik 2014, seminar participants at LMU

Munich, University of Augsburg, and TU Dortmund, the three referees and the coeditor for helpful comments and

suggestions.

Please address correspondence to: Florian Morath, Goethe University Frankfurt, Theodor-W.-Adorno-Platz 4,

60629 Frankfurt am Main, Germany. E-mail: morath@econ.uni-frankfurt.de.

2Chapter 16 of the Stern Review (Stern, 2007) identif‌ied technology-based schemes as an indispensable strategy to

tackle climate change.

3See Moselle et al. (2010) for an overview.

4For the effects of unilateral actions in a public goods framework, see Hoel (1991), Buchholz and Konrad (1994,

1995), Buchholz et al. (2005), and Beccherle and Tirole (2011).

1057

C

(2016) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social

and Economic Research Association

1058 ELSAYYAD AND MORATH

technologies. A country may provide a new technology because this can induce other countries

not to delay their efforts but instead contribute to climate protection today.

To develop this rationale, three distinctive features, which inf‌luence the decision to contribute

to climate protection, are taken into consideration. First, efforts to mitigate global warming are,

to a large extent, private contributions to a global public good. As such, the strategic interaction

between countries causes strong incentives to delay one’s own contribution since, in reaction

to the high effort of one country, other countries can reduce their effort on climate protection.

Second, international coordination is hampered by the fact that there is uncertainty with regard

to the (country-specif‌ic) need for climate protection. The uncertainty connected with climate

protection stems from the fact that the costs and benef‌its of environmental damage and its

reduction remain largely uncertain. The assessment of the impact of climate change is not only

highly reliant on projections of the impact of CO2concentrations on temperatures, but even for a

given rise in global temperature there are substantial uncertainties about the economic and social

consequences for a country.5Consequently, such strong uncertainties should push policymakers

toward a later contribution to climate protection, that is, after some of the uncertainty has been

resolved. Third, greenhouse gas emissions have irreversible consequences and cause damages

that may possibly be mitigated only at a very high cost. Therefore, delaying the f‌ight against

global warming may prove to be expensive. For example, the accumulation of CO2emissions

in the atmosphere is diff‌icult to reduce, and the damage to the ecosystems from an increase in

global temperatures, from acidif‌ied lakes and streams, or from the clear-cutting of forests can

be permanent.6

Our contribution is twofold. First, we extend a standard model of private provision of a

public good to a framework that incorporates the important trade-off that countries face when

deciding on climate policies: uncertainty versus irreversibility of damages. Our model builds on

the classic concept of irreversible investments and the option value of information; however,

we consider investments that exhibit a positive externality and therefore affect other players’

benef‌it from investing.7We derive the equilibrium contributions to climate protection and

identify the main mechanisms driving the timing of the countries’ contribution decisions. In

a two-country model, we show that for low degrees of irreversibility both countries would

like to wait until the uncertainty has been resolved, whereas for high degrees of irreversibility

countries prefer a full early provision. For intermediate ranges of irreversibility, an alternating

equilibrium emerges where one country chooses a “partial” early contribution and the other

country might contribute in a later period of the game, a result strongly in line with empirical

observations.

Second, building on these results, we analyze how an investment in cost-reducing technol-

ogy by one country alters the timing of both countries’ decisions to contribute to climate

protection. We consider an investment in technology in the context of technology sharing

where both countries have access to the cost-reducing technology. Here, we identify two

scenarios where, by a targeted provision of cost-reducing technology, one country can in-

duce the other country to increase its current contribution and in this way reduce the own

burden of contributing. This free-riding incentive for investments in technology is in sharp

contrast to the usual argument that unilateral investments only increase the own burden of

contributing.

Our model is related to the literature on the timing of environmental policy adoption. Mainly

developed by Arrow and Fisher (1974) and Henry (1974) for the case of irreversible investments,

5See Allen et al. (2009) for a summary of CO2impact projections and their variability.

6The 2007 IPCC report on climate change clearly outlines the long-term cost of a ‘business-as-usual’ CO2emissions

path (see IPCC, 2007, Chapter 3). For an overview of different aspects of climate protection policies, see, for instance,

Aldy et al. (2001).

7The results of a standard one-shot public goods game and a model of irreversible investments are obtained as special

cases of our model.