11.7.6 Technological spillover

Mitigation action may lead to more advances in mitigation technologies. Transfer of these technologies, typically from industrialized nations to developing countries, is another avenue for spillover effects. However, as discussed in Chapter 2, effective transfer implies that developing countries have an active role in both the development and the adaptation of the technologies. The transfer also implies changes in flows of capital, production and trade between regions.

Sijm et al. (2004) assess the spillover effects of technological change. They divide the literature into two groups, depending on their ‘top-down’ or ‘bottom-up’ approach to modelling. (See the discussion on the topic in Section 11.3 above.) Most top-down modelling studies omit the effect or show it playing a minor role. The authors argue that the potential beneficial effect of technology transfer to developing countries arising from technological development brought about by Annex I action may be substantial for energy-intensive industries, but has so far not been quantified in a reliable manner. ‘Even in a world of pricing CO₂ emissions, there is a good chance that net spillover effects are positive given the unexploited no-regret potentials and the technology and know-how transfer by foreign trade and educational impulses from Annex I countries to Non-Annex I countries.’ (p. 179).

However, results from bottom-up and top-down models are strongly influenced by assumptions and data transformations and that lead to high levels of uncertainty. ‘Innovation and technical progress are only portrayed superficially in the predominant environmental economic top-down models, and that the assumption of perfect factor substitution does not correctly mirror actual production conditions in many energy-intensive production sectors. Bottom-up models, on the other hand, neglect macroeconomic interdependencies between the modelled sector and the general economy.’ (Lutz et al., 2005). The effects of spillovers combined with learning-by-doing are explored specifically using bottom-up models by Barreto and Kypreos (2002) using MARKAL, and by Barreto and Klaassen (2004) using ERIS. They find that, owing to the presence of spillovers, the imposition of emission constraints in the Annex I region may induce technological change and, hence, emission reductions in the non-Annex I region even when the latter region does not face emission constraints itself.

The existence of spillover effects also changes the theoretical conclusions in the economics literature. In the pure competition-equilibrium model, the most efficient policy is an equal rate of carbon tax for every sector and region. Rosendahl (2004) shows that, for maximum efficiency with spillovers and learning-by-doing, the carbon tax should be higher in those sectors and regions with the highest potential for technological progress. This is a general argument for stronger mitigation in those sectors and countries where technological progress is most likely to be accelerated by higher taxes on carbon use. In a game-theory context, with the shared benefits of R&D improving energy efficiencies, Kemfert (2004, p. 463) finds that ‘full cooperation on climate control and technological improvements benefits all nations in comparison to a unilateral strategy.’

Although the technologies for CO₂ reduction in the electricity sectors are accessible, their dissemination still faces some challenges, especially in economies with low purchasing power and educational levels (Kumar et al., 2003). An additional issue is that technology sharing by the fossil-fuel energy suppliers has been severely limited to date, probably due to the industrial organization of coal, oil and gas production, which is dominated by a few large private and state companies. Unlike, for example, new IT technologies, which quickly become industry standards, newly developed energy-related technology providing a competitive advantage generally becomes available to competitors slowly. However, modelling of the spillovers and the evolution of technologies, as well as structural changes in corporate management, require a better understanding of knowledge production and the knowledge transfer process within and between industries, and of the role and efficiency of transfer institutions such as universities, technology transfer centres and consultancy companies (Haag and Liedl, 2001).