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Global Externalities, Local Policies, and Firm Selection

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  • Lassi Ahlvik
  • Matti Liski

Abstract

How to fight global problems with local tools? When only firms know what externality-producing activities can be relocated, policies shape the location distribution of firm types with different social values. We find that, because of this selection effect, the optimal local policies confront firms’ mobility with elevated corrective externality prices, in contrast with the common remedies for the relocation risk. Our mechanism incentivizes also moving firms to limit the externality, and it influences strategically the distribution of moving firms that comply with policies elsewhere. The magnitude of these effects is illustrated by a quantification for the key sectors in the European Union emissions trading system.

Suggested Citation

  • Lassi Ahlvik & Matti Liski, 2022. "Global Externalities, Local Policies, and Firm Selection," Journal of the European Economic Association, European Economic Association, vol. 20(3), pages 1231-1275.
    • Handle: RePEc:oup:jeurec:v:20:y:2022:i:3:p:1231-1275.
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    Cited by:

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    2. Hokkanen, Topi, 2023. "Externalities and market failures of cryptocurrencies," BoF Economics Review 4/2023, Bank of Finland.
    3. Lassi Ahlvik & Inge van den Bijgaart, 2022. "Screening Green Innovation through Carbon Pricing," CESifo Working Paper Series 9931, CESifo.
    4. Alessia Camplomi & Harald Fadinger & Chiara Forlati & Sabine Stillger & Ulrich J. Wagner, 2024. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics," CRC TR 224 Discussion Paper Series crctr224_2024_495v2, University of Bonn and University of Mannheim, Germany.
    5. repec:bon:boncrc:crctr224_2024_495 is not listed on IDEAS

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