Published in
CESifo Working Paper No. 2962, 2010
Abstract
This paper provides a model in which countries over time pollute as well as invest in technologies (renewable energy sources or abatement technologies). Without a climate treaty, the countries pollute too much and invest too little, partly to induce the others to pollute less and invest more in the future. Nevertheless, short-term agreements on emission levels can reduce welfare, since countries invest less when they anticipate future negotiations. The optimal agreement is tougher and more long-term if intellectual property rights are weak. If the climate agreement happens to be short-term or absent, intellectual property rights should be strengthened, tariffs should decrease, and investments should be subsidized. Thus, subsidizing or liberalizing technological trade is a strategic substitute for tougher climate treaties.