The International Diffusion of Policies for Climate Change Mitigation

Abstract

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: In this paper, we study the international diffusion of carbon pricing policies. In the first part, we empirically examine to what extent the adoption of carbon pricing in a given country can explain the subsequent adoption of the same policy in other countries. In the second part, we quantify the global benefits of policy diffusion in terms of greenhouse gas emission reductions elsewhere. To do so, we combine a large international dataset on carbon pricing with several other datasets. For causal identification, we estimate semi-parametric Cox proportional hazard models. We find robust and statistically significant evidence for policy diffusion. Abstract In this paper, we study the international diffusion of carbon pricing policies. In the first part, we empirically examine to what extent the adoption of carbon pricing in a given country can explain the subsequent adoption of the same policy in other countries. In the second part, we quantify the global benefits of policy diffusion in terms of greenhouse gas emission reductions elsewhere. To do so, we combine a large international dataset on carbon pricing with several other datasets. For causal identification, we estimate semi-parametric Cox proportional hazard models. We find robust and statistically significant evidence for policy diffusion. The magnitude of the estimated effects is substantial. For two neighbouring countries, policy adoption in one country increases the probability of subsequent adoption in the other country on average by several percentage points. Motivated by this result, we use Monte Carlo simulations based on our empirical estimates to quantify both direct domestic and indirect foreign emission reductions of policy adoption and subsequent diffusion. The results based on our central empirical estimates suggest that for most countries indirect emission reductions of carbon pricing can exceed direct emission reductions. Overall, our results provide additional support for the adoption of stringent climate policies, especially in countries where climate change mitigation policies might so far have been considered as being of relatively little importance because of a relatively small domestic economy.