Pollution Haven Hypothesis

In the R&D-based location model, pollution emissions by manufacturing firms and emissions trading are introduced. Through internationally coordinated emissions trading, the emission allowances allocated to manufacturing firms in the North and South are the same. As this allowance generates an allowance allocation rent, a reduction in the total emission allowance leads to economic growth due to the distribution effect. In addition, this rent affects the home market effect. In global spillovers, a reduction in the total emissions allowance and trade liberalisation leads to a green haven effect, with pollution reduction in the South and pollution increase in the North, through the firms’ locations. Pollution abatement and productivity improvement lead to a pollution haven effect, with pollution increase in the South, pollution reduction in the North and a decrease in economic growth rates. The interaction between local spillovers and allowance allocation rent leads to a poverty trap. Furthermore, when the pollution abatement productivity is standardised to 1, the total emission allowance does not affect the location. In the steady state of excessive accumulation in the North, trade liberalisation leads to the pollution haven hypothesis and economic growth, resulting in increased pollution in the South and reduced pollution in the North.