Economic growth, decarbonization and international transfers

We examine a carbon budget-based climate policy in a multi-region Integrated Assessment Model with intertemporal optimization. Innovation and technology diffusion are endogenized in a modern growth theory-based setup that is unique in integrated assessment. They can be directed towards energy or labour productivity. We study in detail how the strength and direction of innovation and technology diffusion influence the dynamic pattern of decarbonization and the structure of mitigation costs. For this purpose, we apply extended decomposition methods for decarbonization and consumption effects. We show that with high labour productivity growth, optimal decarbonization starts earlier and gains from emission permit trade for developing countries are dominated by output reductions. Therefore, additional transfers to developing countries will likely be necessary in a world of high labour productivity growth.