The Pollution Haven Hypothesis: Signicance and Insignicance

Theory and intuition tell us that the imposition of stringent environmental policies by a given country will reduce its net exports of commodities produced using pollution-intensive industries. It is therefore surprising that many empirical studies of international commodity trade have failed to …nd evidence of this e¤ect. This study o¤ers a new, highly focused test of the pollution haven hypothesis, by investigating the link between international factor trade in coal and urban air concentrations of SO2. I …nd statistically signi…cant evidence that countries with poor air quality do have higher net factor exports of coal; however, the magnitude of the impact is small, casting doubt on the economic signi…cance of the pollution haven e¤ect as a guide to policy. In the spring of 2005, as the U.S. Congress debated the Clear Skies Act, which aimed to reduce SO2, NOx, and mercury emissions from coal power plants, the Washington Post reported that "several Republicans said that overly stringent measures would...cause polluting industries to leave U.S. shores for countries with lower standards." This concern, known as the pollution haven hypothesis, is based on the concept that countries which are relatively tolerant of environmental degradation place their pollution-intensive industries at a comparative advantage, and therefore have relatively high net exports of pollution intensive goods. Put another way, increased stringency of environmental protection on the part of "clean" countries is o¤set by increases in the production of pollution-intensive goods for export by "dirty" countries. The policy implication is that the rationale for tightening pollution restrictions in countries such as the U.S. is weakened. While the pollution haven hypothesis has strong roots both in its intuitive plausibility and in a body of theoretical work (see, for example, Pethig 1976, Siebert 1977, and McGuire 1982), it has generally failed to garner strong empirical support across several studies. The empirical literature in this area has generally followed one of two paths: the …rst examines the relation between environmental policies and the location decisions of …rms (industrial ‡ight), while the second examines the impacts of environmental policies on patterns of trade in dirty goods. Empirical studies of industrial ‡ight have yielded mixed results, with some studies …nding evidence of industry location away from jurisdictions with stringent pollution regulations, and most studies not.1 Empirical investigations of the relation between environmental policies and trade patterns of dirty goods, the concern of this paper, have until very recently also failed to support the pollution haven hypothesis. The two most widely cited studies, by Tobey (1990) and Grossman and Kruger (1993), test for an e¤ect of the stringency of environmental regulation on international commodity trade (in cross-country and cross-industry settings, respectively), and …nd no statistically signi…cant e¤ect. Recent research by Levinson and Taylor (2002) and Ederington and Minier (2003), however, has critiqued these studies on the grounds that environmental regulations are not ex-