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Production Leakage: Evidence from Uncoordinated Environmental Policies

Author

Listed:
  • Zhiyuan Li

    (School of Economics, Fudan University)

  • Bing Lu

    (School of Statistics, Beijing Normal University)

  • Sili Zhou

    (Faculty of Business and Administration, University of Macau, and Asia-Pacific Academy of Economics and Management, University of Macau)

Abstract
This paper documents that international trade can cause uneven distribution of production opportunities to countries in face of uncoordinated environmental policies. Specifically, we use exogenous introductions of national carbon policy to study how local firms react to such shocks, especially when they make sourcing decisions on carbon inputs. Results show that regulatory carbon taxes lead domestic firms to import more carbon products, such as cement, iron and steel, from foreign producers. Micro evidence further shows that firms will increase their trade shares to foreign suppliers located in pollution haven. Exploiting global supply chain information, we further find that domestic regulatory carbon taxes do benefit foreign carbon suppliers, helping them to, for example, increase fixed investment, expand production scales and improve financial performance. These findings highlight the importance to take into account international trade when forming environmental policies in order to fulfill the growth, welfare and emission reduction goals of such policies.

Suggested Citation

  • Zhiyuan Li & Bing Lu & Sili Zhou, 2024. "Production Leakage: Evidence from Uncoordinated Environmental Policies," Working Papers 202413, University of Macau, Faculty of Business Administration.
    • Handle: RePEc:boa:wpaper:202413
    as

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    File URL: https://fba.um.edu.mo/wp-content/uploads/RePEc/doc/202413.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Green Trade; Carbon Taxes; Carbon Leakage; Production Reallocation; Global Supply Chain;
    All these keywords.

    JEL classification:

    • F18 - International Economics - - Trade - - - Trade and Environment
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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