The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry

Francesca Sanna-Randaccio () and Roberta Sestini

No 2010.107, Working Papers from Fondazione Eni Enrico Mattei

Abstract: This paper analyses the impact of unilateral climate policy on firms’ international location strategies in emission-intensive sectors, when countries differ in terms of market size. The cases of partial and total relocation via foreign direct investment are separately considered. A simple international duopoly model highlights the differences between short-term and long-term effects. In the short-term no change in location is a likely outcome in very capital-intensive sectors, and when there is a strategy shift this takes the form of partial instead of total relocation. In the long-run total relocation becomes a feasible outcome. However we found that, when tighter mitigation measures are introduced by the larger country and unit transport cost is high, with a pronounced market asymmetry the probability of firms not relocating abroad is high even in the long-term. The welfare implications of unilateral environmental measures are assessed considering global industrial pollution and accounting for shifts in location strategy.

Keywords: Foreign Direct Investment; Carbon Leakage; Climate Policy; Relocation; Transport Costs; Welfare (search for similar items in EconPapers)
JEL-codes: F12 F23 Q58 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry (2012)
Working Paper: The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2010.107

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