Abstract:
The transition to renewable energy depends on the trade of renewable energy equipment, such as solar panels and wind turbines. However, most existing studies on green industrial policies adopt a closed economy approach, overlooking critical margins in an open economy where subsidies can lead to different domestic industry responses due to global competition and have global spillover effects. This paper examines the dynamic effects of green industrial policy on global carbon emissions and welfare in a globalized economy, focusing on the Inflation Reduction Act (IRA), which includes subsidies for producing renewable energy and
renewable energy equipment. I develop a multi-country dynamic general equilibrium trade model in which equipment is traded and accumulated as capital, and productivity improves through learning-by-doing. The quantitative analysis shows the IRA reduces global carbon emissions by 0.60% and increases US welfare by 0.02%, while decreasing global welfare by 0.03%. Considering equipment trade is crucial; without it, the model predicts smaller carbon reductions, a loss in US welfare, and a gain in global welfare.