Framing Environmental Policy in the European Union
New Horizons in Environmental Economics series
Chapter 7: Strategic Environmental Policy
1. INTRODUCTION It is often believed that a government can inﬂuence the competitiveness of an economy through its environmental policy. A strict environmental policy will distract internationally mobile factors and cause a relocation of mobile factors. Conversely, a lax environmental policy may attract internationally mobile factors. As a consequence it is believed rational for a government to engage in a ‘race to the bottom’ and implement lax environmental regulations in pursuit of industry and jobs. This belief is supported by two groups often considered as being opposed. The ﬁrst group, environmentalists, have used it as an argument against free-trade agreements. In the USA, for instance, environmentalists have claimed that NAFTA would result in industrial relocation from the USA to Mexico because of more lax environmental protection regulations there. The environmentalists have feared that the threat of industrial exoduses would motivate governments not to push their environmental regulations too far. The second group, industrialists, have also supported the belief. Industries have threatened governments that they would move abroad if environmental regulations were strengthened. This chapter examines whether governments have incentives to implement a lax environmental policy in order to either attract new ﬁrms or reduce production costs for domestic ﬁrms so that they can then dump their products on international markets. This phenomenon is often referred to as the ‘ecological dumping hypothesis’. In presenting an overview of the literature dealing with ecological dumping and ﬁrm relocation, this chapter argues that even though fear of ecological dumping and ﬁrm relocation has...
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