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Subsidy to environmental industry in a North-South model of trans-boundary pollution, trade and migration

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  • NICOLA CONIGLIO
  • KENJI KONDOH

Abstract

Differences in environmental regulation between rich and poor countries have caused a geographical relocation of polluting industry from the former to the latter. In several cases the reduction in domestic emissions is at least partly compensated by an increase in trans-boundary pollution which is detrimental to the productivity of environmental sensitive sectors (such as agriculture) industry in a developed country. Can a government in a rich country try to correct the negative consequences of trans-boundary pollution when mechanisms such as binding international agreements are difficult to implement? In this paper we build a simple North-South model of trade where the manufacturing plants are completely outsourced in a developing country and we analyze the effects of a subsidy program to pollution abatement industry located in the North. We find that, contrarily to common intuition, the subsidy to the pollution abatement equipment industry might reduce welfare in the North when the efficiency of the pollution abatement technology is already relatively high and when the wage gap between the North and South is high. In addition we find that international migration might have a positive impact on improving the environmental stock and welfare in the North and might be a more efficient and less distortive way to address the trans-boundary externality.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa12p74.

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Date of creation: Oct 2012
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Handle: RePEc:wiw:wiwrsa:ersa12p74

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  1. Kellenberg, Derek K., 2009. "An empirical investigation of the pollution haven effect with strategic environment and trade policy," Journal of International Economics, Elsevier, vol. 78(2), pages 242-255, July.
  2. Copeland, Brian R., 1991. "International trade in waste products in the presence of illegal disposal," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 143-162, March.
  3. Copeland, Brian R & Taylor, M Scott, 1994. "North-South Trade and the Environment," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 755-87, August.
  4. Ando, Mitsuyo, 2006. "Fragmentation and vertical intra-industry trade in East Asia," The North American Journal of Economics and Finance, Elsevier, vol. 17(3), pages 257-281, December.
  5. Brunnermeier, Smita B. & Cohen, Mark A., 2003. "Determinants of environmental innovation in US manufacturing industries," Journal of Environmental Economics and Management, Elsevier, vol. 45(2), pages 278-293, March.
  6. Merrifield, John D., 1988. "The impact of selected abatement strategies on transnational pollution, the terms of trade, and factor rewards: A general equilibrium approach," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 259-284, September.
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