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The Impact of Unilateral Climate Policy with Endogenous Plant Location and Market Size Asymmetry
Author(s) -
SannaRandaccio Francesca,
Sestini Roberta
Publication year - 2012
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2012.01040.x
Subject(s) - relocation , economics , outcome (game theory) , partial equilibrium , welfare , subsidy , investment (military) , duopoly , term (time) , market failure , international economics , microeconomics , general equilibrium theory , market economy , physics , quantum mechanics , politics , computer science , political science , law , programming language
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 both 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 rather than total relocation. In the long‐run total relocation becomes a feasible outcome. However, 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.