STUCK IN A CORNER? CLIMATE POLICY IN DEVELOPING COUNTRIES

Much of the capital equipment used in developing countries is created in the OECD and, thus, is designed to make optimal use of the relative supplies of capital, labor, and energy in these developed countries. However, differences in capital-labor ratios between developed and developing countries create a mismatch between the energy requirements of this capital and developing countries' optimal levels of energy intensity. Using a calibrated macroeconomic model, this paper analyzes the implications of this mismatch for climate policy. I find that using capital equipment with "inappropriate" energy intensity has sizeable consequences for both the effectiveness and the welfare cost of climate policies in developing countries.