Pollution halo or pollution haven? A CGE appraisal for Iran

Abstract

The present study aimed to assess the environmental effects of FDI considering the pollution haven and halo hypotheses. The originality of this article lies in the fact that FDI modeling was done using environmental CGE models, including the modeling of scale, composition, and technique effects of FDI. We execute four scenarios that allow us to consider the impacts of FDI inflow. The results of the first and second scenarios (50% and 100% shock to FDI, respectively) revealed that CO2 emissions increased; however, the increase was more intense in the second scenario. A comparison of these two scenarios indicated that higher FDI leads to higher pollution. In addition, the scale and composition effects were positive, and the technique effect was negative in both scenarios. Nonetheless, the pollution haven hypothesis was confirmed. The third and fourth scenarios (100% shock to FDI with 2.5% and 5% energy efficiency improvement) showed that CO2 emissions increased at a slower rate compared with the first and second scenarios. Moreover, the scale and composition effects were positive, while the technique effect was negative. The comparison of the third and fourth scenarios revealed that higher energy efficiency growth led to decreased CO2 emissions; also, the technique effect became more negative, the scale effect became more positive, and the composition effect decreased. Overall, provided that FDI was accompanied by improvement of energy efficiency, carbon intensity decreased in a way that might lead to a reduction in CO2 emissions. We found that if energy efficiency improvement reached more than 10%, pollution resulting from FDI became negative, and the technique and composition effects nullified the scale effect. Therefore, the pollution halo hypothesis was confirmed. Based on these results, it is recommended that policymakers seek energy-efficient investment with high technology levels to improve the environmental quality and lower the use of polluting energy inputs such as gas.