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The pollution haven effect and investment leakage: The case of the EU-ETS

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  • De Beule, Filip
  • Schoubben, Frederiek
  • Struyfs, Kristof

Abstract

Are polluting firms more likely to invest in environmentally lax countries when confronted with increasingly stringent unilateral environmental policies at home? To answer this question, we explore the relationship between carbon inefficiency, regulatory pressure and the foreign direct investment (FDI) projects of multinational enterprises (MNEs) operating under the European Union Emission Trading Scheme (EU-ETS) during its third phase (2013–2020). Contrary to prior research on its initial and more lenient phases, we provide novel evidence on the existence of a pollution haven effect which enables both investment leakage as well as carbon leakage outside the EU-ETS’s jurisdiction. These results highlight the dangers of implementing a stringent unilateral climate policy from both an economic and an environmental perspective.

Suggested Citation

  • De Beule, Filip & Schoubben, Frederiek & Struyfs, Kristof, 2022. "The pollution haven effect and investment leakage: The case of the EU-ETS," Economics Letters, Elsevier, vol. 215(C).
    • Handle: RePEc:eee:ecolet:v:215:y:2022:i:c:s0165176522001483
    DOI: 10.1016/j.econlet.2022.110536
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    References listed on IDEAS

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    Cited by:

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    2. He, Ling-Yun & Chen, Kun-Xian, 2023. "Does China's regional emission trading scheme lead to carbon leakage? Evidence from conglomerates," Energy Policy, Elsevier, vol. 175(C).

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    More about this item

    Keywords

    Foreign direct investment; EU-ETS; Investment leakage; Pollution haven effect;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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