Thursday, January 21, 2016

Knowledge Diffusion, Endogenous Growth, and the Costs of Global Climate Policy

This paper examines the effects of knowledge diffusion on growth and costs of climate policy. We develop a general equilibrium model with endogenous growth which represents knowledge diffusion between sectors and regions. Knowledge diffusion depends on accessibility and absorptive capacity which we estimate econometrically using patent and citation data. Knowledge diffusion leads to a “greening” of economies boosting productivity of “clean” carbon-extensive sectors. Knowledge diffusion lowers the costs of global climate policy by about 90% for emerging countries (China) and 20% for developed regions (Europe and USA), depending on the substitutability between different knowledge types.   
The impacts of knowledge spillovers on economic growth are substantial, corresponding to welfare gains for the global economy of about 4-10%; they depend on the substitutability between different types of knowledge. Regions with initially relatively low knowledge (e.g., China) benefit the most from knowledge diffusion whereas developed regions (e.g., Europe and U.S.) gain relatively less. In line with previous analyses (Eaton and Kortum, 1999; Keller, 2002), we find that the major sources of technical change leading to productivity growth are not domestic but, instead, lie abroad: international knowledge spillovers account for two thirds of the increase in knowledge capital due to knowledge diffusion, domestic spillovers contribute one third.
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by  Lucas Bretschger 1, Filippo Lechthaler 2, Sebastian Rausch 3, and Lin Zhang 4 all of ETH Zurich, Switzerland
ETH Zurich Economic Working Paper 15/226; December, 2015

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