Environmental 8: Trade Flashcards
What is the pollution haven hypothesis?
When otherwise similar companies face different environmental policy, the one facing laxer policy will be more competitive. Pollution-intensive sectors will therefore cluster in areas with weak policy.
What is the Porter hypothesis?
Well-designed environmental policy leads to more innovation. The strong version of the hypothesis says that these savings more than compensate for the costs of complying with regulation.
State the Heckscher-Ohlin theorem. What does it predict about the environment?
A country will export a good if it has a large relative endowment of the factor of production intensively needed to produce it. Therefore, large, sparsely populated, poor countries will specialise in polluting sectors.
Why might the Heckscher-Ohlin theorem fail to describe trade flows in polluting industries?
If emissions have externalities on productivity or demand patterns, the factor endowment effects may not be decisive in determining where industries locate.
State the Stolper-Samuelson theorem. What does it predict about the environment?
If the relative price of a good increases, the real returns to the factor used most intensively in that good increase, and the real returns to the other factor decrease. This implies that a rise in relative prices for environmental goods will increase permit prices in an exporting country.
State the Rybczynski theorem. What does it predict about the environment?
If the endowment increases in one factor of production, then the production of goods intensive in the other factor will decrease. Therefore, if the government reduces environmental protection, we will see a fall in the production of goods that don’t use environmental resources.
Is there empirical evidence for the Pollution Haven hypothesis?
There is fairly limited evidence that pollution regulations have much effect on the location decisions of polluting industries, because other differences between countries swamp this effect. Branger et al (2016), for example, find that there is little evidence that the EU ETS increased net EU imports of cement and steel.
Why do Copeland and Taylor think that many empirical studies of the pollution haven hypothesis are flawed?
Pollution regulations may be endogenous to trade flows. For example, strong import competition may lead to lax environmental policy. If lax environmental policy also leads to reduced imports, simple regressions will be misleading.
Do changes in environmental regulations affect jobs?
Most studies find no relationship between stricter environmental regulation and employment. Some sectors show positive associations, since labour is needed for pollution control activities.
Do changes in environmental regulations reduce productivity?
Many studies find short-run decreases in productivity when environmental regulations are introduced, but that these effects disappear after 1-2 years. Some find that productivity is higher than the baseline after a few years.
Do changes in environmental regulations induce innovation?
Yes, but not usually by enough to cover the costs of complying with regulation. Additionally, some of the innovation will at the cost of innovation in other sectors.
Suppose a country has an optimal Pigouvian tax in place, and opens up to trade. Will it gain from trade? Will its local environment be damaged?
It will unambiguously gain from trade. Its local environment will be damaged iff it has a comparative advantage in polluting industries.
Suppose a country does not have an optimal Pigouvian tax in place, and opens up to trade. Will it gain from trade? Will its local environment be damaged?
If it has a comparative disadvantage in polluting industries, the environment will improve and there will be gains from trade.
If it has a comparative advantage, the environment will deterioriate, and since these costs are not internalised this may be enough to outweigh the other gains from trade and lead to a net welfare loss.
Will trade increase or decrease transboundary pollution?
If the country with a comparative advantage in polluting goods is relatively less pollution-intensive, transboundary pollution will fall when we open up to trade. Otherwise, it will rise.
What are the scale, composition and technique effects?
Changes to total emissions can be decomposed into changes in total production, plus the change in the share of dirty goods in total output, plus the change in emissions intensity of polluting industries. These are, in turn, the scale, composition and technique effects.
