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Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity

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  • Sanna-Randaccio, Francesca
  • Sestini, Roberta
  • Tarola, Ornella

Abstract

We contribute to the debate on the impact of unilateral climate policy with a two-country two-firm international oligopoly model accounting for endogenous plant location and heterogeneity in both country size and firm’s emissions technology. Our results suggest that, if the carbon price differential is moderate as compared to unit transport costs and the relative size of the highly regulated country is big enough, a no relocation equilibrium may prevail also in the long run. A large market asymmetry coupled with a small technology gap emerges as the only configuration in which unilateral climate policy leads to a fall in world emissions irrespective of the optimal location choice. Thus for being effective and not leading to production relocation, unilateral climate policy should be moderate, implemented by a sufficiently large area and complemented by mechanisms for promoting the international transfer of clean technologies. Welfare implications are also discussed.

Suggested Citation

  • Sanna-Randaccio, Francesca & Sestini, Roberta & Tarola, Ornella, 2014. "Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity," Climate Change and Sustainable Development 172711, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemcl:172711
    DOI: 10.22004/ag.econ.172711
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    Cited by:

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    2. Francesca Sanna-Randaccio & Roberta Sestini & Ornella Tarola, 2017. "Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(2), pages 379-401, June.
    3. Yan, Yan & Li, Yi, 2023. "Technology spillovers, strategic environmental policy, and foreign direct investment," Energy Economics, Elsevier, vol. 127(PA).
    4. Noha Elboghdadly & Michael Finus, 2020. "Strategic Climate Policies with Endogenous Plant Location: The Role of Border Carbon Adjustments," Graz Economics Papers 2020-07, University of Graz, Department of Economics.
    5. Skerdilajda Zanaj & Patrice Pieretti & Benteng Zou, 2021. "On the long run sustainability of small jurisdictions," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(1), pages 15-35, March.
    6. Thierry Madiès & Ornella Tarola & Emmanuelle Taugourdeau, 2022. "Tax haven, pollution haven or both?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1527-1560, December.
    7. Jean J. Gabszewicz & Ornella Tarola, 2021. "Introduction to the special issue: green economy and environmental policies in oligopoly markets," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(1), pages 1-4, March.
    8. Giulia Ceccantoni & Ornella Tarola & Cecilia Vergari, 2022. "Tax and pollution in a vertically differentiated duopoly: when consumers matter," Working Papers 3/22, Sapienza University of Rome, DISS.
    9. Julie Ing & Jean-Philippe Nicolai, 2019. "Dirty versus Clean Firms’ Relocation under International Trade and Imperfect Competition," CER-ETH Economics working paper series 19/319, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    10. G. Ceccantoni & O. Tarola & C. Vergari, 2017. "Relative tax in a vertically differentiated market: the key role of consumers in environment," Working Papers wp2005, Dipartimento Scienze Economiche, Universita' di Bologna.
    11. Paolo GARELLA & Maria Teresa TRENTINAGLIA DE DAVERIO, 2015. "Carbon Tax, Emission Permits, and Carbon Leak under Price Competition," Departmental Working Papers 2015-06, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    12. Giulia Ceccantoni & Ornella Tarola & Cecilia Vergari, 2023. "Tax and pollution in a vertically differentiated duopoly: When consumers matter," Metroeconomica, Wiley Blackwell, vol. 74(2), pages 416-445, May.
    13. Noha Elboghdadly & Michael Finus, 2022. "Strategic climate policy with endogenous plant location: The role of border carbon adjustments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1266-1309, December.

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    Keywords

    Environmental Economics and Policy;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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