Environmental policy under TK diffusion between different environmental countries

Using an endogenous Schumpeterian R&D growth model, this paper intends to analyse how international trade of intermediate goods can affect the structure and diffusion of technological knowledge between ecological and dirty countries. Each country is assumed to have different environmental quality levels and different available technological knowledge and to be able of conducting R&D activities (innovative in ecological-country and imitative in dirty-country). We concluded that under international trade, there is a higher probability of successful imitation that improves the Dirty-country ability to benefit from Ecological-country innovations. This induces an efficient allocation of production in the Dirty-country, where marginal cost is lower, and increases the ecological goods production. Furthermore, subsidies, by promoting technological knowledge progress, lead to a permanent increase in the world steady-state growth rate.