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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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    References listed on IDEAS

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    Cited by:

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    3. Åsa Löfgren & Lassi Ahlvik & Inge den Bijgaart & Jessica Coria & Jūratė Jaraitė & Filip Johnsson & Johan Rootzén, 2024. "Green industrial policy for climate action in the basic materials industry," Climatic Change, Springer, vol. 177(9), pages 1-12, September.
    4. Gerda Dewit & Dermot Leahy, 2025. "Export policy cooperation in a pandemic: the good, the bad and the hopeful," Economica, London School of Economics and Political Science, vol. 92(365), pages 199-229, January.
    5. Hokkanen, Topi, 2023. "Externalities and market failures of cryptocurrencies," BoF Economics Review 4/2023, Bank of Finland.
    6. Markus Dertwinkel-Kalt & Anna Ressi & Christian Wey, 2025. "Why Avoiding Deindustrialization via Subsidies May Trigger a Subsidy Trap and Slow Down Green Investments," CESifo Working Paper Series 12012, CESifo.
    7. Ahlvik, Lassi & van den Bijgaart, Inge, 2024. "Screening green innovation through carbon pricing," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    8. repec:bon:boncrc:crctr224_2024_495v2 is not listed on IDEAS
    9. Campolmi, Alessia & Fadinger, Harald & Forlati, Chiara & Stillger, Sabine & Wagner, Ulrich, 2023. "Designing Effective Carbon Border Adjustment with Minimal Information Requirements. Theory and Empirics," CEPR Discussion Papers 18645, C.E.P.R. Discussion Papers.
    10. Fardella, Carlos & Barahona, Nano & Montero, Juan-Pablo & Sepúlveda, Felipe, 2023. "On the geography of vintage-specific restrictions," Resource and Energy Economics, Elsevier, vol. 75(C).
    11. Ahlvik, Lassi & Liski, Matti & Mäkimattila, Mikael, 2024. "Pigouvian Income Taxation," CEPR Discussion Papers 19117, C.E.P.R. Discussion Papers.
    12. repec:bon:boncrc:crctr224_2024_495 is not listed on IDEAS

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