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2007-04-01 | Discussion Paper

Have Countries with Lax Environmental Regulations a Comparative Advantage in Polluting Industries?

Sterner, Thomas and Martin Persson. 2007. “Have Countries with Lax Environmental Regulations a Comparative Advantage in Polluting Industries?” RFF working paper 07:08
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We aim to study whether lax environmental regulations induce comparative advantages, causing the least-regulated countries to specialize in polluting industries.

The study is based on Trefler and Zhu’s (2005) definition of the factor content of trade. For the econometrical analysis, we use a cross-section of 71 countries in 2000 to examine the net exports in the most polluting industries. We try to overcome three weaknesses in the empirical literature: the measurement of environmental endowments or environmental stringency, the possible endogeneity of the explanatory variables, and the influence of the industrial level of aggregation. As a result, we do find some evidence in favor of the pollution-haven effect. The exogeneity of the environmental endowments was rejected in several industries, and we also find that industrial aggregation matters.