Timing of Adoption of Clean Technologies, Transboundary Pollution and International Trade

Abstract The authors consider a symmetric model composed of two countries and a firm in each country. Firms produce the same good by means of a polluting technology which uses fossil energy. However, these firms can adopt clean technology which uses renewable energy, having lower costs. Interestingly, opening markets to international competition increases the per-unit emission-tax and decreases the per-unit production subsidy. The socially optimal adoption date under a common market better internalizes transboundary pollution than that under autarky. In autarky (resp. a common market), firms adopt the clean technology earlier (resp. later) than what is socially optimal and, therefore, regulators induce clean technology adoption at the socially optimal adoption date by firms postponing (resp. speeding up) adoption subsidies. Opening markets to international trade speeds up socially optimal adoption dates and reduces global flow of pollution.