This paper studies the effect of endogenous technical change and international technology spillovers on carbon leakage. It is well known that a unilateral CO₂ abatement policy in one region may cause CO₂ emissions to increase in non-abating regions because of the relocation of CO₂-intensive firms and because of energy market effects. If, however, the CO₂ mitigation policy induces energy-saving technological innovation in the home region and this innovation can freely spill-over to energy users abroad, carbon leakage may be offset by induced efficiency gains in foreign firms. In this paper we develop a simple mathematical model of carbon leakage and technological spillovers and perform numerical simulations with an adjusted CGE model to illustrate the potential importance of international technology spillovers. We show that carbon leakage can become negative at moderate levels of technology spillover.

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