Pollution haven hypothesis: Pollution Haven Hypothesis: Theory

Pollution haven hypothesis

Pollution haven hypothesis: Competitiveness and the Pollution Haven Effect: Theory

Pollution haven hypothesis: Competitiveness and the Pollution Haven Effect: Empirical Evidence

Pollution haven hypothesis: Pollution Haven Hypothesis: Empirical Evidence

Pollution haven hypothesis: Consumption-Generated Pollution

Pollution haven hypothesis: Natural Capital and Pollution Havens

The first pollution haven model was developed by Pethig (1976). He considered two countries that are completely identical except that one (North) has a higher pollution tax than the other (South). North’s high pollution tax gives it a comparative advantage in the clean good.When trade is liberalized, trade shifts pollution-intensive production to the low-regulation country (South).

Copeland and Taylor (1994) showed how pollution havens could develop in poor countries even if all governments were free to choose whatever pollution policy best suited their countries. In the Copeland and Taylor model, countries are completely identical except in income levels. Northern countries are richer than Southern countries.The key assumption is that environmental quality is a normal good as income increases, consumers demand higher environmental quality. If government policy is responsive to consumer demand, then the model predicts that richer countrieswill havemore stringent environmental policy than poorer countries. Consequently, poor countries will have a comparative advantage in pollution-intensive production. When trade is liberalized, North exports clean goods, and South exports pollution-intensive goods: poor countries will become pollution havens.

This result is only part of the story. In reality, there are many reasons for trade, and the actual pattern of trade depends on the interaction among all such motives. Antweiler, Copeland, and Taylor (2001) developed a pollution haven model suitable for empirical testing by allowing for more than one motive for trade. In this model, countries differ in capital abundance as well as in income levels. Suppose that pollution-intensive industry is also capital intensive and thatNorth is capital abundant.North’s capital abundance tends to give it a comparative advantage in the pollution-intensive industry, but its stringent pollution policy tends to give it a comparative advantage in the clean industry. If the effects of North’s capital abundance on the trade pattern are more important than the cost-increasing effect of its stricter environmental policy, then North will have a comparative advantage in the pollutionintensive good and trade liberalization will shift pollution-intensive production from the lowincome South to the high-income North. In short, theory predicts that pollution policy is but one of many factors that affect trade.Whether or not trade liberalization leads to pollution havens depends on whether the effects of differences in environmental policy on production costs are more or less important than all of the other motives for trade.