Environmental Engineering Reference
In-Depth Information
(2003) found little or no evidence that US abatement costs a
ow of investment
to a sample of four developing countries; however, the small sample of host countries in
this study leaves little scope for controlling for unobserved heterogeneity.
While a number of recent studies found evidence supporting the competitiveness
hypothesis, most rely on US data. More work using data from other jurisdictions, espe-
cially developing countries, is needed.
To conclude the discussion of the competitiveness hypothesis, it is worth reviewing what
this evidence does not imply. First, evidence that more stringent environmental policy
a
ff
ect the
fl
ows is not enough to conclude that the pollution haven
hypothesis is correct. To assess this hypothesis, we need to assess whether the e
ff
ects trade and investment
fl
ects of
environmental policy are strong or weak when compared to other factors. Second, evi-
dence that more stringent environmental policy reduces competitiveness in polluting
industry does not imply that such policy reduces welfare. Rather, it is better seen as evi-
dence that environmental policy works. Weak environmental policy is an implicit subsidy
to pollution-intensive industries. It results in excessive production of pollution-intensive
goods. When environmental policy is tightened, the subsidy is reduced, and pollution-
intensive output contracts as the pattern of production adjusts to re
ff
fl
ect true social costs
of all inputs, including access to the environment.
Pollution haven hypothesis: theory
The pollution haven hypothesis predicts that trade or investment liberalization will cause
production of pollution-intensive goods to shift to countries with relatively weak envi-
ronmental policy. This production shift may occur as a result of either trade or direct
foreign investment. In both cases, the reallocation of production may be augmented by
capital
ows. In the trade version, the hypothesis is simply that countries with relatively
weak environmental policy have a comparative advantage in pollution-intensive produc-
tion. In the investment version, it is a hypothesis about what determines the direction of
foreign investment
fl
ows.
Pethig (1976) developed the
fl
rst pollution haven model. He starts with the simple
Ricardian model of trade and considers two countries that are completely identical except
that one country (North) has a higher pollution tax than the other (South). Since
di
fi
erences in pollution taxes are the only motive for trade, the model predicts that South
has a comparative advantage in the pollution-intensive good, and North has a compara-
tive advantage in the clean good.
In Pethig's model, pollution taxes are exogenous; hence the model does not make any
predictions about what type of countries become pollution havens. Moreover, because
pollution havens are exogenous, governments are not given the opportunity to respond to
in
ff
fl
ows or out
fl
ows of pollution-intensive production. Copeland and Taylor (1994) devel-
oped the
rst pollution haven model with endogenous environmental policy. They con-
sider two countries that are identical except that North is a scaled-up version of South;
hence North is richer than South. The key assumptions that lead to a pollution haven pre-
diction in their model are (1) the demand for environmental quality increases with income
(this assumption is backed up by a large body of evidence - see Copeland and Gulati, 2006
for a review); and (2) governments are responsive to the preferences of their citizens when
implementing pollution policy. Because North's income is higher than South's, North's
government imposes more stringent environmental policy than South's. Because there is
fi