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

39 Pages Posted: 6 Jun 2014 Last revised: 15 Jul 2014

See all articles by Francesca Sanna Randaccio

Francesca Sanna Randaccio

Sapienza University of Rome

Roberta Sestini

University of Rome I

Ornella Tarola

University of Lugano - Institute of Economic Research

Date Written: June 5, 2014

Abstract

We contribute to the debate on the impact of unilateral climate policy with a two-country two-firm international oligopoly model accounting for endogenous plant location and heterogeneity in both country size and firm’s emissions technology. Our results suggest that, if the carbon price differential 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 configuration in which unilateral climate policy leads to a fall in world emissions irrespective of the optimal location choice. Thus for being effective and not leading to production relocation, unilateral climate policy should be moderate, implemented by a sufficiently large area and complemented by mechanisms for promoting the international transfer of clean technologies. Welfare implications are also discussed.

Keywords: Foreign Direct Investment, Carbon leakage, Climate Policy, Emissions Technologies

JEL Classification: F12, F23, Q58

Suggested Citation

Sanna Randaccio, Francesca and Sestini, Roberta and Tarola, Ornella, Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity (June 5, 2014). FEEM Working Paper No. 55.2014, Available at SSRN: https://ssrn.com/abstract=2446504 or http://dx.doi.org/10.2139/ssrn.2446504

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

Ornella Tarola

University of Lugano - Institute of Economic Research ( email )

CH-6900 Lugano
Switzerland
+41919124661 (Phone)
+41919124662 (Fax)

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