Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity

Francesca Sanna-Randaccio, Roberta Sestini and Ornella Tarola
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Francesca Sanna-Randaccio: Department of Computer, Control & Management Engineering, Sapienza University of Rome

No 2014.55, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We contribute to the debate on the impact of unilateral climate policy with a two-country two-firm international oligopoly model accounting for endogenous plant location and heterogeneity in both country size and firm’s emissions technology. Our results suggest that, if the carbon price differential is moderate as compared to unit transport costs and the relative size of the highly regulated country is big enough, a no relocation equilibrium may prevail also in the long run. A large market asymmetry coupled with a small technology gap emerges as the only configuration in which unilateral climate policy leads to a fall in world emissions irrespective of the optimal location choice. Thus for being effective and not leading to production relocation, unilateral climate policy should be moderate, implemented by a sufficiently large area and complemented by mechanisms for promoting the international transfer of clean technologies. Welfare implications are also discussed.

Keywords: Foreign Direct Investment. Carbon leakage. Climate Policy; Emissions Technologies (search for similar items in EconPapers)
JEL-codes: F12 F23 Q58 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-ene, nep-env, nep-int and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity (2017)
Working Paper: Unilateral Climate Policy and Foreign Direct Investment with Firm and Country Heterogeneity (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2014.55

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