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 7: Strategic Environmental Policy

Tim Jeppesen

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


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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