Environmental Regulations and Pollution Havens. An Empirical Study of the Most Polluting Industries.

Abstract

Environmental concerns in the last decades have given rise to environmental regulations, especially in high-income countries. The pollution haven hypothesis argues that differences in environmental regulations unintentionally give the least regulated countries a comparative advantage in the production of pollution intensive goods, turning them into pollution havens. I use the Heckscher–Ohlin– Vanek (HOV) framework to analyse this argument for the five most pollution intensive industries. The empirical approach is developed by Quiroga et al. (n.d.) and includes a sulphur dioxide based measure of environmental endowment in the HOV regression. I use an unbalanced panel for 103 countries between 1995 and 2012. Two industries show significant support for the alternative hypothesis (the Porter hypothesis) which states that regulations, instead of giving firms a competitive disadvantage, spur them to innovation and increase their competitiveness. In conclusion, I argue that the strong support in favour of the pollution haven hypothesis found by Quiroga et al. is driven by Japan and that their result is not robust to the inclusion of heteroskedasticity-robust standard errors.