Environmental Regulation in a Federal System

Environmental Regulation in a Federal System

Framing Environmental Policy in the European Union

New Horizons in Environmental Economics series

Tim Jeppesen

In this important book Tim Jeppesen investigates environmental regulation in a federal system and addresses the underlying question of whether regulation should be decided centrally, by EU institutions, or de-centrally, by individual member states. Whilst simple economic reasoning presumes that transboundary externalities require central solutions and local externalities need local solutions, the author finds that the real answer is much more complicated.

Chapter 6: Impacts of Pollution Control on International Trade and Capital Movements

Tim Jeppesen

Subjects: economics and finance, environmental economics, environment, environmental economics, environmental governance and regulation

Extract

6. Impacts of pollution control on international trade and capital movements 1. INTRODUCTION It is often claimed that environmental regulations have negative consequences for economic activity. Managers fear that increased environmental regulations will increase firm-level environmental compliance costs, thereby reducing firms’ competitiveness. The results, it is argued, are reduced exports, reduced foreign direct investments, firm relocation and increased unemployment. Naturally, governments have been sensitive to such arguments. Consequently, a number of environmental regulations are implemented so as to minimize the burden on firms. That environmental regulations have negative impacts on economic activity was a major argument launched by opponents in the discussions about the introduction of environmental and energy taxes in, for instance, Denmark, Sweden and the Netherlands. They have also played a role in the discussion about an EU CO2 tax. Because of possible capital flight the Dutch energy tax, and the Danish and Swedish CO2 tax, applies only to consumers and small producers (see, for example, Komen and Peerlings, 1999). An EU CO2 tax is still under discussion, but it is doubtful whether it will be introduced at all. Moreover, some of the larger industries in Denmark and Sweden are exempted from the CO2 tax because of possible capital flight. Environmentalists argue that this is unfortunate. First, to exempt large firms from pollution taxes is not in accordance with the polluter pays principle. Second, environmental improvements are reduced. Third, the relationship between environmental regulation and economic activity is ambiguous. Porter (1991) argues, for instance, that environmental regulations and...

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