Pollution havens and agglomeration: The effect of globalization and technological spillover

Abstract

ABSTRACT The statistical significance of the pollution haven hypothesis remains low. This suggests that some elements may have been overlooked in hypothesis testing. Here, pollution havens due to trade liberalization may depend on the degree of technological spillover. This spillover affects the industrial concentration of polluting firms. Using an agglomeration model with technological spillover, we analysed the effect of transport costs on pollution havens to clarify this relationship. Interactions between an international emission permit trading market and local spillover in innovation bring about the following multiple equilibria: the poverty trap equilibrium leads to similar results in the case of global spillover, where lower transport costs encourage economic growth in addition to relocation from the South to the North. By contrast, equilibrium with a higher concentration of firms leads to the pollution havens hypothesis because decreased transport costs prompt polluting firms to relocate to South with relatively small markets due to the home market effect, leading to lower economic growth. Our findings imply that the type of spillover in innovation (local or global) determines the pollution haven hypothesis. In a global economy, narrowing the North-South technology gap could contribute to eliminating pollution havens.