Technology Transfer, Emissions Trading, and International Trade

We explore the effects of international technology transfers on global warming and welfare in a two-country (home and foreign), two-good, general equilibrium model with Ricardian and Heckscher–Ohlin features. We consider a situation in which both countries enforce emissions trading, and the home country, which has superior technologies in both sectors, has a comparative advantage in less emissions-intensive goods under free trade. The home country benefits from technology transfers in the more emissions-intensive industry due to an improvement in its terms of trade. The foreign country can also gain because global greenhouse gas emissions (GHGs) decrease. Technology transfer in the less emissions-intensive sector can lead to a more significant reduction in GHG emissions but may harm the home country. When free trade in emission permits and goods is allowed between countries, technology transfers in either sector will likely increase the emissions permit price without affecting global GHG emissions. An increase in the permit price negatively affects the welfare of the home country that imports permits from the foreign country. International emissions trading may reduce the incentive for technology transfers because there is no environmental benefit, and the permit price is higher.