Technology diffusion under contraction and convergence: A CGE analysis of China

This paper introduces a mechanism of international technology diffusion via FDI and imports into recursive-dynamic CGE modeling for climate policy analysis. As a novel feature, the mechanism distinguishes spillovers from foreign do domestic capital within sectors and across sectors within the production chain. The paper applies the mechanism to the analysis of a contraction and convergence type climate policy focusing on China. The mechanism of international technology diffusion leads to an increase in China's energy productivity an a decline in China's economic growth rates in a convergence process. In this case, inter-regional emissions trading could (more than) compensate China's welfare losses due to climate policy. Otherwise, China's welfare losses due to climate policy could be significant.

Research Highlights►International technology spillovers via FDI and imports in a CGE model. ►General and energy specific spillovers and convergence across regions. ►Horizontal spillovers within sectors and vertical across sectors. ►As a result, China might not be worse off under Contraction & Convergence. ►Otherwise, given high long-term growth, China might be significantly worse off.