Spatial equilibrium analysis of decentralized carbon regulation within a country

Under a decentralized carbon regulation scheme, does the pollution haven hypothesis (PHH) hold true among regions? What kind of leakage consequences will carbon regulation changes in different regions bring? To answer these questions, we establish a spatial equilibrium model, embedding endogenous regional carbon regulation which is affected by the central government’s preference for emission reduction in that region. After calibrating the model using Chinese data, we conduct counterfactual analysis and find that the carbon price can explain composition effect well, i.e., PHH tends to be confirmed among domestic regions, international trade and sectoral linkages are crucial for the manifestation of PHH, while population migration hinders it. Next, we simulate carbon policies based on this model. When increasing carbon regulation stringency in one single province, we find that there is carbon leakage but negative carbon intensity leakage. Strengthening carbon regulation in all provinces simultaneously, results show that under differentiated regulation, welfare increases in most provinces compared to the uniform regulation scenario. Considering the development of renewable energy, provinces with abundant renewable energy endowments will have relatively higher welfare after the regulation shock.