Environmental Policy, Plant Location and Government Protection

Abstract

Policy makers and industrialists frequently express concern about the impact of environmental policy on loss of international competitiveness and in particular the possibility that producers may relocate plants in countries with laxer environmental policies. This concern is reflected in the EC’s carbon/energy tax proposal where some industries may be exempt from the tax if they take voluntary measures to achieve the same targets. Previous studies of the unilateral imposition of environmental taxes have suggested that the welfare losses may be small, but they have assumed competitive markets. The more natural setting for studying these concerns is a model where there are significant scale economies so that there are relatively few plants earning significant rents so that the loss of some plants has welfare significance.