Abstract:
Policy regulations are pertinent to reduce environmental harm. Environmental regulation at the global level is generally preferable to national level regulation, but is politically difficult to achieve. As different countries put in place different environmental policies, firms can exploit country level cost differences by relocating production. Similarly, firms' location choices depend on countries' different trade policy regimes. Firm relocation has in turn implications for the local labor market as well as the local emission level. This paper studies how firm relocation influences political positions to environmental and trade policy. I develop a stylized model of a two-dimensional political spectrum, where two parties dominate the political landscape: a nationalistic labor party that cares about the local industry and a green party that cares about environmental quality. We will see that the labor party will oppose emission taxes and support the industry with trade tariffs in order to attract firms. The green party will advocate for high emissions taxes. Its position towards trade tariffs will depend on whether pollution is local or global. It will advocate for free trade if pollution is local and protectionism if pollution is global.