Production Leakage: Evidence from Uncoordinated Environmental Policies

Zhiyuan Li (), Bing Lu () and Sili Zhou
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Zhiyuan Li: School of Economics, Fudan University
Bing Lu: School of Statistics, Beijing Normal University

No 202413, Working Papers from University of Macau, Faculty of Business Administration

Abstract: This paper documents that international trade can cause uneven distribution of production opportunities to countries in face of uncoordinated environmental policies. Specifically, we use exogenous introductions of national carbon policy to study how local firms react to such shocks, especially when they make sourcing decisions on carbon inputs. Results show that regulatory carbon taxes lead domestic firms to import more carbon products, such as cement, iron and steel, from foreign producers. Micro evidence further shows that firms will increase their trade shares to foreign suppliers located in pollution haven. Exploiting global supply chain information, we further find that domestic regulatory carbon taxes do benefit foreign carbon suppliers, helping them to, for example, increase fixed investment, expand production scales and improve financial performance. These findings highlight the importance to take into account international trade when forming environmental policies in order to fulfill the growth, welfare and emission reduction goals of such policies.

Keywords: Green Trade; Carbon Taxes; Carbon Leakage; Production Reallocation; Global Supply Chain (search for similar items in EconPapers)
JEL-codes: F18 F23 F64 H23 Q56 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2024-06
New Economics Papers: this item is included in nep-agr, nep-ene, nep-env and nep-int
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