Business has often been arguing against the introduction of a carbon tax because it would induce a pollution haven effect – reducing the competitiveness of domestic production and shifting both production and emissions to countries where fossil fuels are cheaper. In this paper, we shed light on such claims by estimating the effect of energy prices on one of the possible channels of the pollution haven effect - foreign direct investment (FDI). Using data for listed firms in 23 OECD countries, we find that the effect of higher domestic energy prices on firms’ outward stock of FDI has been significant and positive, but small in magnitude. This effect seems driven by more permanent shocks to energy prices, in particular by those coming from more stringent upstream environmental policies.
Foreign Direct Investment and The Pollution Haven Hypothesis
Evidence from Listed Firms
OECD Economics Department Working Papers
