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The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry


  • Francesca Sanna-Randaccio

    (Sapienza Università di Roma)

  • Roberta Sestini

    (Sapienza Università di Roma)


This paper analyses the impact of unilateral climate policy on firms’ international location strategies in emission-intensive sectors, when countries differ in terms of market size. The cases of partial and total relocation via foreign direct investment are separately considered. A simple international duopoly model highlights the differences between short-term and long-term effects. In the short-term no change in location is a likely outcome in very capital-intensive sectors, and when there is a strategy shift this takes the form of partial instead of total relocation. In the long-run total relocation becomes a feasible outcome. However we found that, when tighter mitigation measures are introduced by the larger country and unit transport cost is high, with a pronounced market asymmetry the probability of firms not relocating abroad is high even in the long-term. The welfare implications of unilateral environmental measures are assessed considering global industrial pollution and accounting for shifts in location strategy.

Suggested Citation

  • Francesca Sanna-Randaccio & Roberta Sestini, 2010. "The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry," Working Papers 2010.107, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2010.107

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    References listed on IDEAS

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    Cited by:

    1. nada, BELHADJ & GABSZEWICZ, Jean J. & TAROLA, Ornella, 2013. "Social awareness and duopoly competition," CORE Discussion Papers 2013043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. repec:kap:enreec:v:67:y:2017:i:2:d:10.1007_s10640-015-9990-1 is not listed on IDEAS
    3. Robert Elliott & Ying Zhou, 2013. "Environmental Regulation Induced Foreign Direct Investment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 55(1), pages 141-158, May.
    4. repec:kap:iecepo:v:14:y:2017:i:4:d:10.1007_s10368-016-0358-y is not listed on IDEAS
    5. Francesca Sanna-Randaccio & Roberta Sestini & Ornella Tarola, 2014. "Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity," Working Papers 2014.55, Fondazione Eni Enrico Mattei.
    6. repec:rss:jnljse:v2i3p3 is not listed on IDEAS
    7. Andrea Mantovani & Ornella Tarola & Cecilia Vergari, 2014. "Hedonic quality, social norms, and environmental campaigns," Working Papers 2014/36, Institut d'Economia de Barcelona (IEB).
    8. repec:kap:jeczfn:v:122:y:2017:i:3:d:10.1007_s00712-017-0541-9 is not listed on IDEAS
    9. Matthew Cole & Robert Elliott & Toshihiro Okubo, 2014. "International environmental outsourcing," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(4), pages 639-664, November.

    More about this item


    Foreign Direct Investment; Carbon Leakage; Climate Policy; Relocation; Transport Costs; Welfare;

    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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