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Why we can't confirm the pollution haven hypothesis: A model of carbon leakage with agglomeration

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  • John Feddersen
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    Abstract

    The literature on carbon leakage has not yet benefitted from many of the insights of the ‘New Economic Geography’ (NEG).� Most studies assume both an absence of agglomeration forces and that factors do not move inter-regionally.� This paper develops a 2-region NEG model with factor mobility to study the impact of regionally-differentiated environmental regulation on the location of polluting firms.� There are three main results: (i) trade liberalisation can reduce firms’ incentives to relocate in response to a regulatory disadvantage; this arises because trade liberalisation increases the agglomeration forces attracting firms to a given location, and may explain why the pollution haven hypothesis (PHH), which is a common prediction of standard trade models of environmental regulation, has been so difficult to detect empirically; (ii) unilaterally tightening environmental regulation by one region may increase global pollution; and (iii) if industry is dispersed between regions, individual firms respond to higher (lower) relative domestic pollution taxes by polluting more (less).

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    Bibliographic Info

    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 613.

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    Date of creation: 01 Jun 2012
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    Handle: RePEc:oxf:wpaper:613

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    Keywords: Carbon leakage; Environmental regulation; International environmental agreements; International trade; Pollution haven;

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