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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.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.107.

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Date of creation: Sep 2010
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Handle: RePEc:fem:femwpa:2010.107
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