This paper demonstrates how increased investment and technology transfer could reduce greenhouse gas emissions from developing countries while promoting, rather than retarding, economic growth. The paper develops a model of economic growth with embodied technology based on Solow (1960) and estimates parameters of the model from historical energy and economic statistics. The estimated model is used to examine the implications of increasing the rate of investment in developing countries, using that investment to speed the retirement of old technology, and upgrading new investment to include the technologies now being chosen in OECD countries.
Even though new investment in non-Annex B countries has far lower emissions per unit of output than the existing capital stock, non-Annex B countries still are not using the level of technology found in Annex B countries. Accelerating replacement of existing capital reduces emissions while increasing GDP growth, but when accelerated replacement is combined with improvement of the emissions intensity of new investment to OECD levels there are much larger emission reductions. The potential for reducing emissions through increased investment and improved technology is estimated to be larger than the reductions in emissions that would if all Annex B countries met their Kyoto Protocol targets.
The policy challenges are is to understand better the reasons why developing countries still lag in technology and to develop joint efforts between developing countries and the United States. Those joint efforts need to address the fundamental institutional problems in developing countries that impede foreign investment and application of the most advanced technologies, to correct pricing systems that make energy efficient technologies unprofitable, and to provide incentives for greater flows of investment and technology to developing countries. To sustain progress in reducing emissions, it is also critical that incentives also be increased for R&D into new energy technologies applicable to developing countries, that may even allow those countries to leapfrog over current technology and gain larger emission reductions.