The paper “Energy, Trade, and Innovation: The Tragedy of the Locals”, co-authored by Giulia Valacchi, PhD candidate in International Economics and Research Assistant at CIES, has been selected as the Best Paper at EconWorld 2016, an international conference in economics held in Barcelona on 1–3 February 2016. It is an outcome of the CIES research project “The Adoption of Clean Energy Technologies in South Africa” funded by SNSF.
This paper analyses the use of different energy sources in a dynamic trade model with endogenous innovation. The authors consider two regions, North and South, the first with high environmental concerns and the second endowed with abundant fossil fuel resources. In this asymmetric setting, the South specialises in energy production using fossil fuels, causing local and global environmental damages. The North, instead, specialises in other manufacturing and imports energy inputs from the South. Endogenous innovation reinforces this pattern of specialisation over time. It is showed that the North can unilaterally stop the use of fossil fuels and avoid a global climate disaster with two different strategies: either redirecting the comparative advantage of the South towards manufacturing, relocating the production of energy to the North, or buying fossil fuel deposits in the South. These two policies have different implications in terms of monetary costs and environmental outcomes for the North. The choice between the two depends on the valuation of the environment, the energy requirements of final goods’ production, the starting time of the policy and the time preferences of the North. Overall, however, there is no costless way for the North to stop unilaterally the use of fossil fuels.
Full citation:
Ravetti, Chiara, Tania Theoduloz and Giulia Valacchi. Energy, Trade, and Innovation: The Tragedy of the Locals. CIES Research Paper 41. Geneva: The Graduate Institute. 2016.