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

43 Pages Posted: 7 Oct 2010

Date Written: June 2010

Abstract

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.

Keywords: Foreign Direct Investment, Carbon Leakage, Climate Policy, Relocation, Transport Costs, Welfare

JEL Classification: F12, F23, Q58

Suggested Citation

Sanna Randaccio, Francesca and Sestini, Roberta, The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry (June 2010). FEEM Working Paper No. 107.2010, Available at SSRN: https://ssrn.com/abstract=1687555 or http://dx.doi.org/10.2139/ssrn.1687555

Francesca Sanna Randaccio (Contact Author)

Sapienza University of Rome ( email )

via del Castro Laurenziano, 9
Rome, RM 00161
Italy
+39 06 4829 9228 (Phone)
+39 06 4829 9218 (Fax)

Roberta Sestini

University of Rome I ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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