Exporting Pollution: Where Do Multinational Firms Emit CO2?

Abstract

Despite awareness of the detrimental impact of CO2 pollution on the world climate, countries vary widely in how they design and enforce environmental laws. Using novel microdata about multinational firms’ CO2 emissions across countries, we document that firms headquartered in countries with strict environmental policies perform their polluting activities abroad in countries with relatively weaker policies. These effects are stronger for firms in pollution-intensive industries and firms with poor corporate governance characteristics. Although firms headquartered in countries with strict domestic environmental policies are more likely to export pollution to foreign countries, they nevertheless emit less overall CO2 globally. Our findings highlight the importance of collective action to combat climate change given the global scale of firms’ operations.

Keywords: Pollution, Production, Climate Change, CO2 Emission, Environmental Regulation

JEL Classification: F23, N50, O13, P18, Q56, R11