Ingrid Hjort, UIO. "The relocation effect: Environmental policy, tariffs and political trade-offs"
Department seminar. Ingrid Hjort is a PhD student at the University of Oslo. She will present the paper: "The relocation effect: Environmental policy, tariffs and political trade-offs"
Firms' production is not bound to a specific location, whereas policy regulations are national. Production relocates in order to exploit country level cost differences. Relocation cause an emission leakage effect, as pollutive firms bring their emissions when they relocate. Hence, firm relocation effects the size of the local manufacturing sector, in addition to having environmental implications. This raise political motivation for manipulating firms' relocation incentives to improve national interests. The terms in an additive welfare function can reflect social interests in a stylized two-dimensional political spectrum. The nationalistic labor party cares about the local industry and the local green party cares about the environmental quality.
The paper studies how the relocation externality is influencing political positions to trade and environmental policy. In particular, the labor party advocates for under-regulating emissions and protect the industry with tariffs in order to attract firms. The green party strongly oppose tariffs in case of local pollution. Yet, if pollution is global and the country is leading in climate regulation, the green party becomes protectionistic.