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We study the North-South diffusion of technologies embodied in internationally mobile capital in a framework of intertemporal global welfare maximization. Convergence of the growth rates of technical change in the North and South always occurs in the long-run. However, the degree to which the North-South technology gap can be narrowed depends crucially on the level of the absorptive capacity (human capital, infrastructure, legal framework, etc.) in the South. Performing own innovations in the South narrows the technology gap only in the short-run. An optimal development policy requires more capital to be allocated to the South in earlier stages of development. Allowing for optimal investment into the absorptive capacity, the absorptive capacity rises steadily with the aim to close the technology gap completely. Our results show that an optimal development policy requires FDI to be matched by investment into the absorptive capacity.

We apply standardized numerical techniques of stochastic optimization (Judd [1998]) to the climate change issue. The model captures the feature that the effects of uncertainty are different with different levels of agent's risk aversion. A major finding is that the effects of stochasticity differ even in sign as to emission control with varying parameters: introduction of stochasticity may increase or decrease emission control depending on parameter settings, in other words, uncertainties of climatic trends may induce people's precautionary emission reduction but also may drive away money from abatement.

In the presence of rising carbon concentrations more attention should be given to the role of the oceans as a sink for atmospheric carbon. We do so by setting up a simple dynamic global carbon cycle model with two reservoirs containing atmosphere and two ocean layers. The net flux between these reservoirs is determined by the relative reservoir size and therefore constitutes a more appropriate description of the carbon cycle than a proportional decay assumption. We exploit the specific feature of our model, the mixing of the carbon reservoirs, by allowing for a special form of carbon capture and storage: The capture of CO2 from the air and the sequestration of CO2 into the deep ocean reservoir. We study the socially optimal anthropogenic intervention of the global carbon cycle using a non-renewable resource stock. We find that this kind of carbon capture and storage facilitates achieving strict stabilization targets for the atmospheric carbon content. It accelerates the slow natural flux within the carbon cycle, and because of its temporary abatement character it dampens the overshooting of the atmospheric reservoir. Furthermore, we analyze the optimal paths of the carbon tax. The carbon tax shows to be inverted u-shaped but depending on the initial sizes of the reservoirs and the speed of carbon fluxes between the reservoirs we also find the optimal tax to be increasing, decreasing or u-shaped. Finally, we suggest to link the level of the carbon tax to the declining ability of the deep ocean to absorb atmospheric carbon.

This paper deals with the problem of tackling the adverse effect of output growth on environmental quality. For this purpose we use an intermediate sector that builds putty-practically-clay capital consisting of an amalgam of energy and raw capital used for final goods production. The putty-practically-clay model is a strongly simplified version of a full putty-clay model, that mimics all the relevant behaviour of a full putty-clay model, but that does not entail the administrative complications of a full putty-clay model. In addition, we introduce an R&D sector that develops renewable and conventional energy-related technologies. The allocation of R&D activities over these two uses of R&D gives rise to an induced bias in technical change in line with Kennedy (1964). In the context of our model, this implies that technological progress is primarily driven by the desire to counteract the upward pressure on production cost implied by a continuing price increase of conventional energy resources. By means of illustrative model simulations we study the effects of energy policy on the dynamics of the model for alternative policy options aimed at achieving Greenhouse Gas emission reductions. We identify the conditions under which energy policy might partly backfire and present some non-standard policy implications.