Climate Cooperation and Spatial Industrial Relocation: Stability, Emissions, and Regional Policy Incentives

Climate policy changes production costs and can reshape the geography of production. We study this spatial channel in a focused model where mobile industrial activity responds to local attractiveness, agglomeration strengthens attractiveness, and carbon policy lowers the profitability of emissions-intensive locations. The model yields an explicit carbon-policy threshold separating spatial instability from stability. When emissions intensity rises with local industrial density, spatial concentration raises aggregate emissions even with unchanged total industrial activity. Embedding these dynamics in a two-jurisdiction policy game creates a wedge between regional and collective incentives: each government values the industrial activity located within its own territory, while aggregate welfare internalizes the effect of policy on economy-wide concentration. With transferable utility, cooperation can select a policy on the stable side of the threshold while the non-cooperative policy lies on the unstable side. A numerical exercise illustrates this regime change. European regional evidence, based on industrial emissions and gross value added at NUTS2 level, documents a positive emissions-activity association and identifies the empirical quantities needed to measure relocation and concentration effects. The analysis links climate cooperation to the spatial organization of production and establishes a benchmark for policy-induced industrial relocation.