Distribution neutral abatement policy in a model of trade and environment*

Monica Das and Sandwip K. Das

Environment and Development Economics, 2009, vol. 14, issue 4, 457-472

Abstract: The Pollution Haven Hypothesis (PHH) states that with weak environmental policies a country can create comparative advantage in the polluting sector. This paper formulates a 3-good-3-factor model where the abatement input is a pure intermediate good. In our model, the PHH as well as the neoclassical trade theorems are valid only when environmental policies are distribution neutral. Inspired by the US Clean Air Act, we develop and estimate a dynamic panel model. We find that US environmental policies are consistent with distribution neutrality. Our results indicate that lowering abatement standards in all industries is the only way the US can become a pollution haven. In the context of our model, the PHH has damaging implications for the world environment.

Date: 2009
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