The Pollution Haven Hypothesis argues that firms will seek to avoid the cost of stringent environmental regulations (and high energy prices) by locating production in countries where environmental norms are laxer. In this context, the studies below provide new reassuring evidence on the effect of energy prices on firms’ outward Foreign Direct Investment (FDI).
Higher energy prices are indeed associated with higher outward FDI stock at the firm-level. However, the effects are small with respect to other drivers of FDI. A simulation presented in the Figure below shows that the introduction of a significant carbon price (USD 55 per tonne of CO2) introduced in one country – resulting in higher energy prices - would not have a major effect on delocalisation of domestic manufacturing activity. So, while technically the results are evidence of the pollution haven hypothesis, they confirm that this effect is unlikely to be large. This conclusion is in line with previous results found in the context of Global Value Chains.
The estimates are based on listed firms in 23 OECD countries, spanning across 1995-2011 and 9 manufacturing industries. They are robust to a range of subsamples and various tests.
Simulated effect of a unilateral carbon tax on firms’ international to total assets ratio
(average for the listed-firm sample)
Note: These figures report the simulated effect of the introduction of a carbon tax on the international-to-total assets ratio. We calculate the effect as follows. First, we match a country-year carbon intensity measure for energy use – which accounts for the number of tonnes of CO2 (tCO2) emitted per ton of oil equivalent (TOE) – with our firms dataset. Next, for each firm, we calculate the hypothetic energy price including the carbon tax by: (i) multiplying the carbon intensity measure (tCO2/TOE) with the hypothetical carbon tax (USD/tCO2), which provides the carbon price per TOE (USD/TOE); (ii) adding this carbon price (USD/TOE) to the observed price (USD/TOE) faced by firms. Finally, by multiplying the (log) percentage increase in energy price due to the carbon tax and the estimation results in our paper, we obtain the effect of carbon pricing on the international-to-total asset ratio in percentage points. We consider two scenarios: a tax of USD 15 per tonne of CO2 (panel A) and a tax of USD 55 per tonne of CO2 (panel B).