Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity

Abstract

We contribute to the debate on the impact of unilateral climate policy with a two-country two-…rm international oligopoly model accounting for endogenous plant location and heterogeneity in both country size and …rm's emissions technology. Our results suggest that, if the carbon price di¤erential is moderate as compared to unit transport costs and the relative size of the highly regulated country is big enough, a no relocation equilibrium may prevail also in the long run. A large market asymmetry coupled with a small technology gap emerges as the only con…guration in which unilateral climate policy leads to a fall in world emissions irrespective of the optimal location choice. Thus for being e¤ective and not leading to production relocation, unilateral climate policy should be moderate, implemented by a su¢ ciently large area and complemented by mechanisms for promoting the international transfer of clean technologies. Welfare implications are also discussed.

North-South diffusion of climate-mitigation technologies: the crowding-out effect on relocation

“…, 2015; Sanna-Randaccio et al. , 2017), licensing (Kamien et al. , 1992; Banerjee and Poddar, 2019), or internal transfer through multinational (Ethier and Markusen, 1996; Fosfuri et al.…”

End-of-pipe or cleaner production? How to go green in presence of income inequality and pro-environmental behavior

“…Petrakis and Xepapadeas, 2003;Ulph and Valentini, 2001;Abe and Zhao, 2005;Ikefuji et al, 2016). Finally, a part of them developed the analysis under the assumption of country asymmetry (Zeng and Zhao, 2009;Sanna-Randaccio and Sestini, 2012), or both country and firm heterogeneity (Sanna-Randaccio et al, 2016) with exogenous unilateral climate policies. In our case, we do not focus on the effects of unilateral policies on firms' location.…”

Tax and pollution in a vertically differentiated duopoly: When consumers matter

“…Finally, we contribute to the debate on the incentive to relocate manufacturing activities to react to unilateral climate policy, thereby avoiding tax compliance. In a large strand of theoretical research, several arguments are found both in favor and against the possible shift of domestic activities abroad due to unilateral carbon taxes, whereas the empirical literature provides mixed evidence (e.g., Ikefuji et al., 2016; Sanna‐Randaccio et al., 2017). Although we do not introduce an international oligopoly, we observe that there is no incentive for firms to relocate in presence of the N‐RQ tax when it is targeted to consumers.…”