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Why we can't confirm the pollution haven hypothesis: A model of carbon leakage with agglomeration

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  • John Feddersen

Abstract

The literature on carbon leakage has not yet benefitted from many of the insights of the ‘New Economic Geography’ (NEG). Most studies assume both an absence of agglomeration forces and that factors do not move inter-regionally. This paper develops a 2-region NEG model with factor mobility to study the impact of regionally-differentiated environmental regulation on the location of polluting firms. There are three main results: (i) trade liberalisation can reduce firms’ incentives to relocate in response to a regulatory disadvantage; this arises because trade liberalisation increases the agglomeration forces attracting firms to a given location, and may explain why the pollution haven hypothesis (PHH), which is a common prediction of standard trade models of environmental regulation, has been so difficult to detect empirically; (ii) unilaterally tightening environmental regulation by one region may increase global pollution; and (iii) if industry is dispersed between regions, individual firms respond to higher (lower) relative domestic pollution taxes by polluting more (less).

Suggested Citation

  • John Feddersen, 2012. "Why we can't confirm the pollution haven hypothesis: A model of carbon leakage with agglomeration," Economics Series Working Papers 613, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:613
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    File URL: http://www.economics.ox.ac.uk/materials/papers/12043/paper613.pdf
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    More about this item

    Keywords

    Carbon leakage; Environmental regulation; International environmental agreements; International trade; Pollution haven;

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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