The potential impact of unilateral environmental policy on national firms’ competitiveness is a major political issue both in the EU and the US. Some fear that domestic firms in carbon-intensive sectors will shift  production to countries not taking comparable actions, leading to considerable job losses. The paper addresses this issue, analysing the effects of unilateral environmental policy on firms’ international location strategies in pollution-intensive sectors, when countries differ in terms of market size. The cases of partial and total relocation are separately considered. The model highlights the differences between short-term and long-term effects. In the short-term no change in location is a likely outcome in capital-intensive sectors, and when there is a strategy shift this takes the form of  partial instead of total relocation, contrary to the predictions of the Pollution Haven Hypothesis. 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 via foreign direct investment is high even in the long-term. The welfare implications of unilateral environmental measures are assessed, accounting for shifts in location strategy. The relief provisions in favour of some energy-intensive sectors in the EU Directive 2009/29/EC and in the proposed US legislation are then compared and discussed in the light of the previous results.

This seminar has been jointly organized by FEEM and IEFE, Bocconi University.