Professor Samuel Kortum on trade research, climate policy, and his path as an economist
by Sarah Guan
February 2, 2021
For Sam Kortum, the James Burrow Moffett Professor of Economics at Yale, becoming an EGC affiliate in 2020 meant coming full circle. As a Yale PhD student in the late 80s, Kortum worked with Professor Robert E. Evenson, development economist and director of EGC from 1997 to 2000 and of the IDE program from 1977 to 2003.
One of Evenson’s papers, a model of innovation motivated by the development of high-yielding varieties of sugarcane, inspired Kortum to think differently about technological change. In essence, technological improvements come about by drawing ideas from a distribution and keeping the best ones. Much of Kortum’s early work evolved from this probabilistic model of technological change after he received his PhD from Yale in 1992.
Kortum started his academic career as an Assistant Professor at Boston University, where he met frequent co-author Jonathon Eaton, who pushed him to consider the role that technology plays in international trade, growth, and development. The two won the prestigious Frisch medal in 2004 for their paper titled “Technology, Geography, and Trade,” which showed how a probabilistic formulation of David Ricardo’s trade theory makes it tractable even with many countries, hence amenable to empirical analysis. The Frisch medal is awarded every two years by the Econometric Society to the best applied paper published in the journal Econometrica in the preceding five years, and is one of the top three prizes awarded in the field of economics.
“For developing countries, trade has been a way to accelerate growth, in part through its role in spreading better technologies.” - Sam Kortum
When asked how his work relates to the field of development economics, Kortum said, “For developing countries, trade has been a way to accelerate growth, in part through its role in spreading better technologies.” He also added that “being good at stealing technology is a key for development, as Bob Evenson used to joke half seriously.”
Since returning to Yale in 2012, most of Kortum’s work has centered around international economics, at the national level and all the way down to individual transactions between foreign and domestic firms.
Recently, Kortum has been exploring alternative options for green policies that would be efficient in lowering global carbon emissions in the absence of a uniform international carbon price, widely viewed by economists as the best option.
Kortum said, “The typical policy proposal would tax the firms that are actually combusting the hydrocarbons to create energy for production in a country, or the people who consume the things they’re producing.” He explained that policymakers can go from one to the other by using “border adjustments” on goods that impose carbon taxes on imports and remove them on exports. In either case these policies lower the demand in the taxing region, and thus reduce the worldwide price of energy.
In a new paper, Kortum and David A. Weisbach of the University of Chicago Law School propose a strategy that reduces the problem of leakage caused by the energy price decline to users abroad. Leakage occurs when firms respond to a country’s taxes by relocating to another country, or when consumers in another country respond to the lower energy price by consuming more. Not only can leakage hurt the domestic economy, it undercuts the goal of lowering global emissions levels.
“Now, what if you tax the guys who are extracting the carbon from under the ground?” Kortum posed. “This will raise the world price of energy because it lowers energy supply. A partial border adjustment on energy imports and exports can shift part of the tax burden from energy extractors to energy users. So, we’re saying that you can find a happy combination between demand-side and supply-side taxes that can achieve a lot more in terms of reducing global emissions at a lower cost to your own economy." To find the “happy combination,” the paper puts forth a model of optimal unilateral carbon tax policy which has been calibrated to fit the data.
“This solution would likely be more practical than policies currently on the table,” Kortum said. “Since other proposals include border adjustments on goods, they could be a bureaucratic nightmare to implement.” On the contrary, Kortum explained, it is straightforward to impose a tax on the carbon content of energy when it is imported (at some fraction of the extraction tax rate), or to remove some portion of the extraction tax when energy is exported. Another practical feature is that there are relatively few energy extractors to tax in the first place.
Kortum argues that if the United States and other key actors, such as the European Union and China, were to enact these optimal taxation policies, they could lower carbon emissions while reducing the incentive for firms to move production to developing countries, which may be slow to adopt green policies.
EGC Director Rohini Pande said that she is delighted that Kortum has joined EGC as a faculty affiliate. “Trade research has been one of the pillars of EGC’s program ever since its founding in 1961,” she said. EGC’s first annual report emphasized the importance of studying the development of several closely related trading nations as part of its work on “quantitative analysis of a national economy as an integral whole.”
Pande noted, “Since then, globalization and trade have only become more important for economic development.”