Climate Policy, Learning, and Technology Adoption in Small Countries 1 Fuhai Hong 2 and Susheng Wang 3 July 2011 Abstract: A significant reduction in global greenhouse gas emissions requires international cooperation in emission abatement as well as individual countries’ investment in the adoption of abatement technology. The existing literature on climate policy pays insufficient attention to small countries, which account for a substantial proportion of global emission. In this study, we investigate how climate policy and learning about climate damage affect investment in abatement technology in small countries. We consider three alternative climate policy instru- ments: emission standards, harmonized taxes and auctioned permits. We say that learning is feasible if an international environmental agreement (IEA) is formed after the resolution of uncertainty about climate damage. We find that, either with learning and quadratic abatement costs or without learning, harmonized taxes outperform emission standards and auctioned permits in terms of investment efficiency. Without learning, a large cost of nonparticipation (that a country incurs) in the IEA can be beneficial to the country. Whether learning improves investment efficiency depends on the size of this nonparticipation cost. Keywords: Learning; Auctioned Permits; Emission Standards; Harmonized Taxes; Interna- tional Environmental Agreements; Small Countries; Abatement Technology JEL Classification: Q54, Q55, Q58 1 Acknowledgement: The refereeing process resulted in a major improvement to the paper and the input from an anonymous referee is gratefully acknowledged. All errors remain our own. We also thank Larry Karp and semi- nar participants at UC Berkeley for helpful comments. 2 Assistant Professor, School of Economics, Shanghai University of Finance and Economics. Email: hong.fuhai@mail.shufe.edu.cn. 3 Professor, Department of Economics, Hong Kong University of Science and Technology. Email: s.wang@ust.hk. Forthcoming on Environmental and Resource Economics