Can Stricter Environmental Regulations Increase Export of the Polluting Good?

Abstract

Abstract According to the Pollution Haven Hypothesis (PHH), weak environmental policies improve a country's comparative advantage in the polluting sector, thus promoting its expansion. In this paper, we develop a neo-classical general equilibrium model with two goods and two factors and show that the relationship between environmental policies and comparative advantage can be ambiguous. We focus entirely on emission caps or command and control (CAC) programs of regulation and treat abatement as equivalent to a technological retardation. We show that when the technological retardation is Hick neutral, the PHH holds and the Heckscher Ohlin Samuelson (HOS) theorem determines trade patterns between a capital-abundant country and a labor-abundant country that follow different environmental policies. If pollution abatement is capital biased in the polluting sector, the standard trade theorems and the PHH may not hold. The paper derives a sufficient condition under which the PHH would hold. However, if this condition is violated, the PHH as well as the HOS theorem may not hold.