Corruption and Globalisation

The variety expansion model, including environmental tax, is extended to the R&D-based location model, including emissions trading. More manufacturing firms in the North bribe government officials to avoid environmental taxes than in the South. The decline in the price of emission allowances due to the North’s tax increase lowers economic growth rates through the distribution effect. Expenditure changes reduce the number of firms in the North and FDI, reducing pollution in the North and increasing in the South. As the tax rate gap widens, the total bribe in the North decreases due to the decrease in the number of firms. However, political and economic factors cause the pollution haven hypothesis. The tax rate decrease due to tax evasion raises the economic growth rate through the soaring price of emission allowances and moves manufacturing firms from the South to the North, increasing the total bribe amount in the North. This implies the green haven effect. Therefore, environmental tax evasion in developed countries may hinder the pollution haven hypothesis. Reducing the fine rate changes the direction of pollution haven from the South to the North and brings about sustainable development through pollution reduction and economic growth in the South.