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The Economics of Pollution Havens
  • Don Fullerton, University of Texas at Austin
A "pollution haven" may arise if environmental regulations differ between countries, if capital is mobile, and if trade rules allow firms to relocate and still sell their products to the same customers. The three appearances of the word "if" in that sentence suggest a whole host of theoretical and empirical questions under the general heading of "pollution havens," and many such questions have been addressed in the economics literature in the past ten years since Brian Copeland and M. Scott Taylor introduced the first complete model of pollution havens (Quarterly Journal of Economics, 1994). To categorize those questions, they later use "pollution haven effect" to refer to the relatively unambiguous effect of environmental regulations on the incentives to relocate, and "pollution haven hypothesis" to refer to the more ambiguous effects of trade liberalization on those incentives (Journal of Economic Literature, 2004). This distinction is important, because the existence of a "pollution haven effect" of environmental policy is a necessary condition for the validity of the "pollution haven hypothesis" that trade liberalization will drive firms away from countries with strict pollution laws. The "pollution haven hypothesis" is highly controversial, both to trade economists and to environmental economists. It takes as given an unequal worldwide distribution of income, and it assumes that environmental protection is a normal good. These assumptions are then used to generate predictions about trade patterns and pollution emissions in each country. At its simplest, the hypothesis states that liberalization of international trade in goods will lead polluting producers to move away from countries with tight environmental protections and towards countries with lax protection. If so, then the environment will worsen in countries with weak regulation (those with relatively low income per capita) and improve in countries with tight regulation (those with relatively high income per capita). Total worldwide pollution is then predicted to rise. In the ten years following the statement of this hypothesis, further research has faced both theoretical and empirical challenges. One empirical difficulty is the assumption that differences in regulations are the key determinant of relative production costs and location decisions. The empirical literature must deal with other motivations that are likely to loom large in actual economies. In addition, the hypothesis was originally construed to apply to the problem of pollution caused by industrial production, and hence it has unclear implications for the use of renewable resources or for the amount of pollution from consumption activities such as driving. The empirical literature has used data on trade flows, and data on foreign direct investment. Some of it provides evidence on the size of any "pollution haven effect" – the sensitivity of firm location to environmental regulations – and some of it has tried to test the pollution haven hypothesis directly by looking at changes in trade rules. In contrast, the theoretical literature has tried to relax various assumptions in the original model of Copeland and Taylor, in order to extend it to answer other questions. Their original model focuses on environmental policy differences between rich and poor countries, and it therefore assumes that these differences determine location decisions of firms in different industries. It assumes that neither rich nor poor countries control trade by the use of tariffs or by strategic use of environmental policy. The model assumes no trans-boundary pollution, and it employs the concept of a social planner in each country who corrects all pollution externalities within each country. Thus, this literature asks about the implications of other effects on firm location decisions, of simultaneous tariff and environmental policies, of strategic use of environmental policy, of trans-boundary pollution, and of political economy considerations such as lobbies, corruption, or just simple majority rule in a nation of heterogeneous voters. Given this flurry of research activity, and great policy interest, it is time to take stock of the economic literature on pollution havens. Ten years after Copeland and Taylor's original paper, The B.E. Journals in Economic Analysis & Policy (BE-JEAP) have provided on the internet a collection of 16 new research papers. Since these journals do not appear in print, we are very pleased that Edward Elgar Publishers agreed to publish a collection of these papers. All 16 papers first appeared in 2004 at , and now all are collected in this book. In the first paper, Scott Taylor provides a particularly useful introduction to the topic and a summary of just how each of the other 15 papers fits into the literature. He "unbundles" the pollution haven hypothesis into a series of five links. Some of the papers in this volume relate to the first link, in which country characteristics determine environmental rules; some relate to the second link in which those rules affect production costs; some relate to the next link in which production costs affect trade or FDI flows; some relate to the effect of those flows on pollution, prices, and incomes; and finally, some relate to the ways those last considerations feed back into the determination of environmental rules. Rather than try to summarize all 16 papers, this preface will just use a few examples to demonstrate the importance of the collection. One theoretical paper points out how the Pollution Haven Effect can be reversed: if more stringent environmental protection in one country induces firms to do more research in abatement technology, and if other countries can freely use the new technology, then the outcome may be less pollution abroad. Another points out that the effect of trade integration on environmental policy is conditional on the degree of political stability. For another example, one of the empirical papers uses annual industry-level data to find that the US has shifted toward cleaner production and toward cleaner imports, and it finds no evidence that pollution-intensive industries have been disproportionately affected by tariff changes. The collection of papers in this book will be appreciated by all researchers in "trade and the environment", and by many others who work only in one field or the other – those in international trade and those in environmental economics. It will also be useful to multidisciplinary audiences in political science, public policy, and environmental studies.
Publication Date
D. Fullerton
Edward Elgar Publishers
Citation Information
Don Fullerton. The Economics of Pollution Havens. Cheltenham, UK(2006)
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