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

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.


Issue Date:
2010-10
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/94789
Total Pages:
43
JEL Codes:
F12; F23; Q58
Series Statement:
SD
107.2010




 Record created 2017-04-01, last modified 2017-08-25

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