Emission transfers, pollution havens, and environmental regulations

We develop a model incorporating monopolistic competition, intra-industry trade, international capital flows, and endogenous environmental policies to explore the pollution haven hypothesis and emission transfers. Firms’ mark-ups and prices depend on their spatial distribution, creating strategic incentives for countries to relax environmental policies to enhance capital returns. This can turn the country with a larger market size into a pollution haven. Even with stricter policies, the large country’s abundant endowments can make it the net importer of emissions, explaining the mixed empirical evidence for the pollution haven hypothesis. Our numerical analysis shows that capital mobility does not always weaken regulations, and that the pollution haven may be subjected to lower welfare. We also find that imposing tariffs raises emission taxes, thereby reducing global pollution. This contrasts with the consumption-based pollution case, where tariffs lower environmental taxes and may increase global pollution.