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Does the EU ETS Cause Carbon Leakage in European Manufacturing?

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... Despite a large body of theoretical and simulation studies on ETSs, 1 empirical studies, especially those focusing on leakage, are still limited. Although empirical evidence on the EUETS is gradually accumulating, most analyses rely on sector-level (Branger et al., 2017;Dechezleprêtre et al., 2019;Koch and Basse Mama, 2019;Naegele and Zaklan, 2019;Sartor, 2013), state-level (Murray and Maniloff, 2015), or firm-level data (Borghesi et al., 2020;Chan et al., 2013;Dechezleprêtre et al., 2019;Jaraite-Kažukauske and Di Maria, 2016;Koch and Basse Mama, 2019;Martin et al., 2014b;Petrick and Wagner, 2014). To our knowledge, there are very few studies that examine the EUETS using facility-level data, probably due to data limitations . 2 Thus, this study's major contribution lies in its use of facility-level data, allowing us to investigate the carbon leakage issue. ...
... Although a growing body of empirical literature on ETSs has led to a consensus regarding their positive influence on emission reduction from regulated entities, the research reports contrasting results on ETSinduced carbon leakage. For instance, Fell and Maniloff (2018), Bartram et al. (2019), and Gao et al. (2020) suggest the presence of leakage in regional ETSs in the US and China, but most studies on the EUETS find little evidence of cabon leakage based on survey-data (Martin et al., 2014a(Martin et al., , 2014b, and sectoral-data analyses (Branger et al., 2017;Dechezleprêtre et al., 2019;Koch and Basse Mama, 2019;Naegele and Zaklan, 2019;Sartor, 2013). 3 In this regard, our data produce new results: Japanese regional ETSs have led to negative carbon leakage, that is, a reduction in CO2 emissions from unregulated facilities, outside Tokyo/Saitama, owned by ETS entities. ...
... Furthermore, our estimation results surprisingly suggest negative leakage within firms, due to the ETSs, implying that the introduction of ETSs caused the positive spillover effect of bridging the energy efficiency gap, which was larger than the negative spillover effect of production relocation. This finding differs from the empirical literature that reports positive leakage (Bartram et al., 2019;Fell and Maniloff, 2018;Gao et al., 2020), or little evidence of leakage (Branger et al., 2017;Dechezleprêtre et al., 2019;Koch and Basse Mama, 2019;Martin et al., 2014aMartin et al., , 2014bNaegele and Zaklan, 2019;Sartor, 2013). One plausible reason for the negative leakage in the Japanese case is the unique requirements of the Energy Conservation Act. ...
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We use facility-level panel data on CO2 emissions to investigate within-firm carbon leakage associated with Japanese regional emission trading systems (ETSs) at large-scale facilities in Tokyo and Saitama prefectures. A difference-in-difference analysis reveals that, relative to entities with no facility under ETSs, entities with regulated facilities have reduced emissions not only from these regulated facilities but also from unregulated facilities outside Tokyo/Saitama. This result indicates that regional ETSs serve as a turning point for entities to bridge the energy-efficiency gap. The data also suggest that a larger entity is more capable of reducing emissions from facilities in regions with less stringent regulations.
... Evidence of carbon leakage has so far been very difficult to detect due, primarily, to the challenge in attributing changes in production levels and trade to EU-28 climate policy during a time of economic volatility caused by the economic recession. However, given the low carbon price as a result of the imbalance in the supply and demand of allowances, and the free allocation given to sectors or sub-sectors at risk of carbon leakage, it is unlikely that carbon leakage, at least with regards to production leakage, has occurred [6,7]. This evidence needs to be continually updated in light of changes to environmental policies both within the EU-28 and abroad and other factors (i.e., economic developments, technological changes, currency fluctuations and labour and transportation costs) that may influence levels of production and trade. ...
... In the current carbon leakage list, the manufacture of cement is defined as being at a significant risk of carbon leakage for reasons of induced carbon costs alone as it well exceeds the 30% threshold (i.e., 45.5%) [6]. Despite the potential risk of carbon leakage for the cement sector due to carbon costs, recent ex-post evaluations in the literature suggest that this risk has not, so far, been realised and that carbon pricing impacts are more limited than experienced in other industrial sectors [7,10,11]. (2) Aluminium production refers to both upstream (i.e., production of primary aluminium from alumina, which is energy intensive and the production of secondary aluminium from refining recycled waste and scrap that is less energy intensive) and downstream (i.e., aluminium rolling and aluminium extrusion) processes. Given the energy intensive nature of primary aluminium production, there is a risk that the impact of the EU ETS on energy prices is undermining the competitiveness of the sector. ...
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This paper contributes to the existing literature on carbon leakage by using a range of different publically available datasets in order to develop a systematic approach for identifying whether products are potentially at risk of carbon leakage. The scope of this paper focuses on the cement and aluminium sectors at different levels of product aggregation to demonstrate the variation in trade patterns that exist over time. The evolution of EU-28 trade flows with third countries for these sectors between 2000 and 2016 enables the selection of key third countries that could warrant further investigation via more quantitative techniques in order to determine the impact of carbon pricing on trade patterns. This systematic approach could be replicated for additional sectors in further research as part of a more regular assessment to provide evidence of carbon leakage for European industry. No evidence of carbon leakage is found in this paper for clinker and cement, while there is no conclusive evidence for unwrought non-alloyed aluminium and aluminium products.
... 1. Flyttad produktion: att inhemsk industri, som en följd av klimatåtgärder och regleringar, flyttar produktionsanläggningar till andra länder där kostnaderna för utsläpp av växthusgaser är lägre eller klimatrelaterade regleringar är mindre krävande (Naegele & Zaklan, 2019). ...
... 4. Minskad konkurrenskraft: att läckage kan uppstå om klimatåtgärder i ett land försämrar konkurrenskraften för företaget så till den grad att exporten minskar, produktionen minskar eller att verksamheten läggs ned och ersätts av produktion i andra länder med lägre klimatregleringar och kostnader för utsläpp. Ett tecken på sådant läckage kan utryckas i förändrad marknadsandel på exportmarknaderna (Naegele & Zaklan, 2019). På motsvarande sätt kan det förekomma förändringar av industriell produktion i motsatt riktning som bidrar till negativa koldioxidläckage genom samma kanaler. ...
Research
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I den här rapporten analyseras konsekvenserna av EU:s nya industripolitik för svensk industri. Rapporten inleds med en genomgång av de teoretiska och praktiska erfarenheterna av industripolitik i EU:s ekonomiska historia, inklusive den senaste debatten över hur en modern industripolitik kan eller bör utformas för att komma tillrätta med de utmaningar som världsekonomin står inför. I kapitel 2 diskuteras teknikskiften och kompetensförsörjning i svensk industri. I kapitlet går vi genom förutsättningarna för svensk industris kompetensförsörjning och hur den kan komma att påverkas av framtida teknikskiften. Kapitel tre fortsätter med en djupare analys av den del av EU:s industripolitik som syftar till att hantera klimatomställning – the green deal – där den ledande tanken är att införa en koldioxidtull för att undvika koldioxidläckage. Analysen fokuserar på förekomsten av koldioxidläckage och möjliga effekter av införandet av en koldioxidtull för svensk industri. Rapporten avslutas med en sammanfattande diskussion om möjliga konsekvenser av EU:s industripolitik för svensk industris konkurrenskraft och framtida kompetensförsörjning.
... Naegele and Zaklan [3] investigated changes in the trade flows, particularly in embodied carbon, and whether the EU ETS causes carbon leakage in the European manufacturing sector, but they did not find evidence for this. Nonetheless, the most prominent tools in use against carbon leakage are border adjustment and output-based allocations. ...
... where e s denotes the power related carbon dioxide emissions from any carrier type s, i.e. coal and gas respectively, as given in Tab. 3. A similar study of consumption based carbon emissions within the actual European power grid was recently carried out by Schäfer et al. [29]. ...
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Global warming is one of the main threats to the future of humanity and extensive emissions of greenhouse gases are found to be the main cause of global temperature rise as well as climate change. During the last decades international attention has focused on this issue, as well as on searching for viable solutions to mitigate global warming. In this context, the pricing of greenhouse gas emissions turned out to be the most prominent mechanism: First, to lower the emissions, and second, to capture their external costs. By now, various carbon dioxide taxes have been adopted by several countries in Europe and around the world; moreover, the list of these countries is growing. However, there is no standardized approach and the price for carbon varies significantly from one country to another. Regionally diversified carbon prices in turn lead to carbon leakage, which will offset the climate protection goals. In this paper, a simplified European power system with flexible carbon prices regarding the Gross Domestic Product (GDP) is investigated. A distribution parameter that quantifies carbon leakage is defined and varied together with the base carbon price, where the combination of both parameters describes the spatially resolved price distribution, i.e. the effective carbon pricing among the European regions. It is shown that inhomogeneous carbon prices will indeed lead to significant carbon leakage across the continent, and that coal-fired electricity generation will remain a cheap and therefore major source of power in Eastern and South-Eastern Europe - representing a potential risk for the long term decarbonization targets within the European Union.
... Part of the economic literature has focused on the macroeconomic effects of carbon pricing (Metcalf & Stock, 2020), especially its impacts on economic growth and the competitiveness of regulated industries. For instance, this approach is often used by articles analyzing carbon leakage (Naegele & Zaklan, 2019). A second group of studies has focused on the distributional consequences of carbon pricing (Dorband, Jakob, Kalkuhl, & Steckel, 2019;Wang, Hubacek, Feng, Wei, & Liang, 2016). ...
Article
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In order to achieve the temperature goals of the Paris Agreement, the world must reach net‐zero carbon emissions around mid‐century, which calls for an entirely new energy system. Carbon pricing, in the shape of taxes or emissions trading schemes, is often seen as the main, or only, necessary climate policy instrument, based on theoretical expectations that this would promote innovation and diffusion of the new technologies necessary for full decarbonization. Here, we review the empirical knowledge available in academic ex‐post analyses of the effectiveness of existing, comparatively high‐price carbon pricing schemes in the European Union, New Zealand, British Columbia, and the Nordic countries. Some articles find short‐term operational effects, especially fuel switching in existing assets, but no article finds mentionable effects on technological change. Critically, all articles examining the effects on zero‐carbon investment found that existing carbon pricing scheme have had no effect at all. We conclude that the effectiveness of carbon pricing in stimulating innovation and zero‐carbon investment remains a theoretical argument. So far, there is no empirical evidence of its effectiveness in promoting the technological change necessary for full decarbonization. This article is categorized under: • Climate Economics > Economics of Mitigation Abstract Our review of empirical ex‐post evaluations of the effects of existing carbon pricing schemes reveals some effects on operational shifts, mainly switching coal to gas power, but no effect on the technological change necessary for full decarbonization.
... While short-term leakage is usually detected through increased imports, long-term production relocation may be analysed through outbound foreign direct investments (FDI, see Koch & Basse Mama, 2016). Several trade flow analyses show that the carbon price level did not lead to any significant carbon leakage in the European primary aluminium sector (Sartor, 2012), in the cement and steel sectors (Boutabba & Lardic, 2017;Branger, Quirion, & Chevallier, 2017) or in manufacturing sectors 11 (Naegele & Zaklan, 2017). Focusing on German and Italian multinationals, respectively, Koch and Basse Mama (2016) and Borghesi, Franco, and Marin (2016) show that the EU ETS did not lead to relocation through outbound FDI for the average firm. ...
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Environmental policies may have important consequences for firms’ competitiveness or profitability. For the European Union Emissions Trading System (EU ETS) the empirical literature documents that significant emissions reductions have resulted from it. Surprisingly, however, the literature shows that there have been hardly any concurrent negative effects on firms’ competitiveness during the first two phases of the scheme (2005–2012). We show that the main explanations for the absence of negative impacts on competitiveness are a large over-allocation of emissions allowances leading to a price drop and the ability of firms to pass costs onto consumers in some sectors. Cost pass-through combined with free allocation, in turn, partly generated windfall profits. In addition, the relatively low importance of energy costs indicated by their average share in the budgets of most manufacturing industries may have limited the impact of the EU ETS. Finally, small but significant stimulating effects on innovation have been found so far. Several factors suggest that over-allocation is likely to remain substantial in the upcoming periods of the scheme. Therefore, we expect to see no negative competitiveness effects from the EU ETS in Phases III and IV (2013–2030). Key policy insights • Empirical literature on the EU ETS shows that there have been hardly any effects on firms’ competitiveness or profitability. • One main explanation is a large over-allocation of emissions allowances leading to a price drop. This reduced incentives for innovation. • Moreover, firms were able to pass costs on to consumers in some sectors which partly generated windfall profits. • Innovation effects have so far been small but positive. • We expect to see no negative competitiveness effects on regulated firms in the near future suggesting that no further reliefs for regulated firms are required.
... However, the few ex-post studies for the EU ETS have so far not revealed any substantial leakage effect, neither via sectoral trade flows (e.g. Naegele and Zaklan 2017), nor through a rise in Foreign Direct Investment, analyzed for Italian MNEs by Borghesi, Franco, and Marin (2018) and for German MNEs by Koch and Basse Mama (2016). The study by Dechezleprêtre, Gennaioli, Martin, and Muûls (2015) is so far the investigation that most closely shares our conceptual emphasis on potential intrafirm shifts of emissions. ...
... [23] • Following the general European policy to progressively phase out coal-fired power plants, the availability of fly ash is threatened. Regarding the future availability of GGBFS, current studies have found that EU ETS has not led to carbon leakage for the steel sector [104]. Nevertheless, the progressive reduction of free allowances to the European steel sector and that the increase of the EUA price may one day overcome the costs of transporting and importing tariff of steel from outside the EU. ...
Thesis
Through the case of a Portland cement producer, this dissertation explores opportunities for an energy-intensive industry in Denmark to decouple its operations from the use of non-renewable resources and direct greenhouse gas (GHG) emissions and thereby sets emission-reduction targets for 2030. Guidelines are provided to reach those emission-reduction targets through the use and distribution of by-products while keeping environmental impacts beyond the factory gates to a minimum. Findings show that using by-products within cement production and optimizing the distribution of excess heat is an effective way to reduce process and fuel emissions. However, this should be done with a good understanding of the markets. Because the availability of a by-product cannot adjust to the demand for it and because competition for good alternatives to virgin resources has increased, attention must be paid to reduce environmental impacts beyond the factory gates that may occur by way of demand displacement. Besides the use and distribution of by-products, increasing cement strength and investing in renewable energy also provide a significant reduction in GHG emissions. More generally, this dissertation reflects on the role of life cycle assessment to support energy-intensive industries as they are pressed to find alternatives to the use of non-renewable resources.
... g. Dechezleprêtre et al., 2014;Naegele and Zaklan, 2019) and various authors also expect only limited (or even negative) leakage for the future (e. g. Heilmayr and Bradbury, 2011;Gerlagh and Kuik, 2014). ...
Article
We argue that the European Union Emissions Trading System (EU ETS) has evolved into a hybrid of two design variants, allowance trading (cap-and-trade) and credit trading (performance standard rate trading), with an added feature of industry support to minimize carbon leakage. In particular the current rules tying free allowances to production capacity expansion, plant closure and capacity use have transformed the efficient cap-and-trade program that stood at the origins of the EU ETS into a system that even surpasses credit trading in paying hidden product subsidies to firms. This combination of rules encourages an inefficiently high level of investment in production capacity and an inefficiently high output in industries exposed to international competition. The result is a sub-optimal EU Emissions Trading ‘Hybrid’ (which we therefore label as ‘EU ETH’).
... The first set supports a positive correlation between trade openness and CO 2 emissions (Machado et al., 2001;Dinda and Coondoo, 2006;McAusland, 2008;Tamazian and Bhaskara Rao, 2010). Felder and Rutherford (1993) find that emissions can be shifted via international trade, a phenomenon known as carbon leakage (Copeland and Taylor, 1995;Babiker, 2005;Elliott et al., 2010;Bushnell and Mansur, 2011;Naegele and Zaklan, 2018). Fischer and Fox (2011) attribute carbon leakage to the lack of comparable regulations of trading partners. ...
Article
This paper attempts to explore the determinants of CO2 emissions in the context of international trade. While there exist studies that examine the roles of horizontal specialization and inter-industry trade transactions, little previous research attention has been paid to the roles of vertical specialization and intra-industry trade transactions in affecting CO2 emissions. To fill the knowledge gap, this study uses the panel data of 62 countries and regions for the period of 1995-2011 to estimate the effect of participation in global value chains (GVCs) on per capita CO2 emissions. Major findings include: (1) The relationship between participation degrees in GVCs and per capita CO2 emissions is found to be inversely U-shaped at the aggregate economy-level and for most individual industries; (2) Per capita GDP shows an N-shaped relationship with per capita CO2 emissions; and (3) Benign drivers of CO2 emissions include R&D, energy conservation, and population control. It can be concluded that countries with low GDP or GVC participation degrees are expected to experience worsening CO2 emissions in the short or even medium run. This trend, however, can be moderated or even reversed with more R&D investments.
... Due to the existence of regional trade, regional Scope 3 emissions could be quite different from Scope 2 emissions, and neglecting the impact of regional trade on regional electricityrelated carbon emissions will lead to carbon leakage (Feng et al., 2013;Liu et al., 2015;Zhang et al., 2016). Carbon leakage is defined as the shift of carbon emissions from a region with emission constraints to an unregulated region (Naegele and Zaklan, 2019). Specifically, regional Scope 3 emissions can be reduced by purchasing products from other regions, leading to emissions increases in other regions Meng et al., 2018). ...
... Furthermore, regulatory decisions will be important. Relevant regulations from a market engineering perspective are rules on carbon leakage, which are supposed to protect industries from competitors with less severe regulations (Naegele and Zaklan 2019). ...
Chapter
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Since the beginning of the energy sector liberalization, the design of energy markets has become a prominent field of research. Markets nowadays facilitate efficient resource allocation in many fields of energy system operation, such as plant dispatch, control reserve provisioning, delimitation of related carbon emissions, grid congestion management, and, more recently, smart grid concepts and local energy trading. Therefore, good market designs play an important role in enabling the energy transition toward a more sustainable energy supply for all. In this chapter, we retrace how market engineering shaped the development of energy markets and how the research focus shifted from national wholesale markets to more decentralized and location-sensitive concepts.
... Zhou et al. (2019) calculated six HM emissions (namely, Hg, As, Pb, Cr, Se, and Cd) generated by decommissioned CFPPs in China in 2010 and evaluated the impacts of shutting down these CFPPs on HM emissions. However, these studies only focus on production-based (end-of-pipe) electricity-related HM emissions (PE-HM emissions) and ignore the reallocation effects of power transmission and regional trade on regional HM emissions (Ma and Zhang, 2019), which may lead to cross-regional HM emission leakage (similar to carbon leakage) Naegele and Zaklan, 2019). On the one hand, by purchasing electricity from other regions, HM emissions from local power generation plants can be prevented. ...
Article
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Coal-fired power plants (CFPPs) are key point sources to atmospheric heavy metal (HM) emissions in China. Unevenly distributed CFPPs lead to large-scale interregional power transmission, as well as corresponding environmental emissions transfer. However, the effect of power transmission on HM reallocation remains poorly understood. Here, we traced HM (including Hg, As, Se, Pb, Cd and Cr) emission flows through electricity transmission and regional trade and calculated China’s multi-perspective electricity-related HM emissions from 2010 to 2015. Results show that in 2015, power transmission and regional trade caused 226.5 t (14% of total emissions) and 453.6 t (28%) of HM emission flows, respectively, leading to great differences in provincial HM emissions under different perspectives (e.g., Beijing’s consumption-based emission was 15.5 times higher than the city’s production-based emission in 2015). Our study provides valuable insights for fairly allocating provincial HM emission reduction responsibility and formulating synergistic emission mitigation strategies among regions.
... Views on the impact of some legal regulations on carbon leakage are divergent. Some authors believe that there is no evidence that the EU Emissions Trading System (EU ETS) causes carbon leakage (Naegele, Zaklan, 2019). However, there is fundamental consensus that the risk of carbon leakage is higher in the case of energy-intensive industries. ...
Article
The objective of the paper is to identify and classify the conditions for unethical environmental behaviour. It has been shown that the primary condition for unethical environmental behaviour is the level of environmental ethics dominant in a community and the observed inconsistency between the declared level of this ethics and the practice of business, institutional (including legal), social, market, etc. behaviour towards the environment. The observed axiological inconsistency generates numerous external and internal phenomena (factors, conditions) that create fertile ground for unethical activities leading to environmental degradation. The external conditions comprise, among others, complicated tax systems, subsidy and subvention systems and prices of emission allowances. The short term perspective of enterprises, the decreasing average working time of managers, a crisis of ethical leadership and a low level of responsibility for the environment have been identified as the most important internal conditions. Unethical environmental behaviour is further intensified in the absence of control and external reaction to its occurrence.
... Clò (2010) is also of this opinion, who argued that in order to deal with carbon leakage, free quotas would have continued to be central. Contrarily, Naegele and Zaklan (2019) think that there is no evidence that the EU ETS, at least with low CO 2 prices, has induced carbon leakage in European manufacturing sectors. In addition, Gilbertson and Reyes (2009) found that the EU ETS was ''generously rewarded polluting companies while failing to reduce emissions''. ...
Article
Since its founding institutions the European Economic Community and Eratom, the European Union has paid great attention to energy issues. However, its powers have been updated in relatively recent times. Similarly, the EU has promoted in the post-Kyoto Protocol environmental issues with a leading by example approach and implementing an ambitious plan to decarbonize the economy with the energy transition and emission limitation through a market instrument, the emission trading system. The European emissions trading system has been the most ambitious management of negative externalities related to GHG set-up at the international level. The EU now considers that the costs of ecological industrial transition could limit the ability of European industries to compete in the globalized market with industries not subject to similar limits and costs. The EU intends to adopt a carbon adjustment tax at the border, to limit the phenomenon of reallocation and compensate for environmental costs. This paper analyses the various proposals and their advantages and disadvantages. The focus is on the charge on emissions mechanism, which is one of the three proposals the European Economic and Social Committee suggested to the European Commission for further investigation in view of the current competitive asymmetry now recognized by the EU Commission itself. The charge on emissions would value industrial emissions directly within the VAT and use the blockchain to track the emissive supply chain of products.
Article
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The year 2020 marks the centennial of the publication of Arthur Cecil Pigou’s mag-num opus The Economics of Welfare. Pigou’s pricing principles have had an endur-ing influence on the academic debate, with a widespread consensus having emerged among economists that Pigouvian taxes or subsidies are theoretically desirable, but politically infeasible. In this article, we revisit Pigou’s contribution and argue that this consensus is somewhat spurious, particularly in two ways: (1) Economists are too quick to ignore the theoretical problems and subtleties that Pigouvian pricing still faces; (2) The wholesale skepticism concerning the political viability of Pig-ouvian pricing is at odds with its recent practical achievements. These two points are made by, first, outlining the theoretical and political challenges that include uncertainty about the social cost of carbon, the unclear relationship between the cost–benefit and cost-effectiveness approaches, distributional concerns, fragmented ministerial responsibilities, an unstable tax base, commitment problems, lack of acceptance and trust between government and citizens as well as incomplete inter-national cooperation. Secondly, we discuss the recent political success of Pigouvian pricing, as evidenced by the German government’s 2019 climate policy reform and the EU’s Green Deal. We conclude by presenting a research agenda for addressing the remaining barriers that need to be overcome to make Pigouvian pricing a com-mon political practice.
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Statements and Declarations Competing Interests and Funding: I declare no competing interest. I did not receive funding for this research. Data availability: data and programs for this research are available at https://www.openicpsr.org/openicpsr/project/1 54181. 2 The impact of environmental regulations on manufacturing outsourcing: reexamining the pollution haven effect in global value chains Abstract As countries worldwide attempt to address a series of global and domestic environmental challenges, the pollution haven effect remains an ongoing concern among trade and environment researchers and policymakers. This paper examines the pollution haven effect in the context of global value chains using inter-country input-output data at the manufacturing industry level from 1995-2009. This paper pays special attention to the issue of "double-counting" caused by intermediate trade. The analysis utilizes two outsourcing measures and two revealed comparative advantage measures appropriate for analyzing global value chains. I propose women's political power as a novel instrumental variable to address the endogeneity of environmental regulation. Regression results show that more stringent environmental policies are not a significant determinant of manufacturing outsourcing and competitiveness in global value chains. At the same time, women's political power is associated with more stringent environmental policies.
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International trade literature tends to focus heavily on the production side of general equilibrium, leaving us with a number of empirical puzzles. There is, for example, considerably less world trade than predicted by Heckscher-Ohlin-Vanek (HOV) models. Trade among rich countries is higher and trade between rich and poor countries lower than suggested by HOV and other supply-driven theories, and trade-to-GDP ratios are higher in rich countries. Our approach focuses on the relationship between characteristics of goods and services in production and characteristics of preferences. In particular, we find a strong and significant positive correlation of more than 45% between a good's skilled-labor intensity and its income elasticity, even when accounting for trade costs and cross-country price differences. Exploring the implications of this correlation for empirical trade puzzles, we find that it can reduce HOV's over-prediction of the variance of the net factor content of trade relative to that in the data by about 60%. Since rich countries are relatively skilled-labor abundant, they are relatively specialized in consuming the same goods and services that they are specialized in producing, and so trade more with one another than with poor countries. We also find a positive sector-level correlation between income elasticity and a sector's tradability, which helps explain the higher trade-to-GDP ratios in high-income relative to low-income countries.
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This article reviews the empirical literature on the impacts of environmental regulations on firms’ competitiveness as measured by trade, industry location, employment, productivity, and innovation. The evidence shows that environmental regulations can lead to statistically significant adverse effects on trade, employment, plant location, and productivity in the short run, in particular in a well-identified subset of pollution- and energy-intensive sectors, but that these impacts are small relative to general trends in production. At the same time, there is evidence that environmental regulations induce innovation in clean technologies, but the resulting benefits do not appear to be large enough to outweigh the costs of regulations for the regulated entities. As measures to address competitiveness impacts are increasingly incorporated into the design of environmental regulations, future research will be needed to assess the validity and effectiveness of such measures and to ensure they are compatible with the environmental objectives of the policies.