Francesca Sanna-Randaccio paper - The Business School

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Proposition I: With full symmetry a more stringent environmental tax imposed by country I ( t I t II ) will lead to some form of relocation (total or partial), except for extreme values of s . Proof: Setting A a c , we have that 2 ( t t ) 2( A t ) s TR NR 4 ˆ ˆ 1 1 I II I s 9b With low transport costs Eq. (9) is always strictly positive since ( t ) s , and 2( A t I ) s s ˆ 0 NR TR is that ˆ1 1 ˆ 1, II t I II because of 0 NR q . In the high transport costs case a sufficient condition for s 3( t I t II ) , that is if we exclude extreme values of s , since with s 3( t I t II ) the term in curly brackets in Eq. (9) is positive. With symmetry in market size and plant costs, there is only one centripetal force (captured by the term 2 s ) discouraging firm 1 to choose TR, which may be labelled as the “lower competition” effect. By choosing TR firm 1 would in fact forego the benefits due to the cost asymmetry it enjoys vis-à-vis the foreign exporter when serving the home market via local production. 21 With low transport costs this centripetal force is always insufficient to compensate for the effect of the more stringent pollution tax which, by rising unit variable costs, stimulates the local firm to move production abroad. This is also generally the case with high transport costs. The “lower competition” effect is obviously not present if we consider an international monopoly (see Sanna-Randaccio and Sestini 2010). can state: Furthermore, transport costs influence the characteristics of the process of relocation. We Proposition II : With full symmetry and low transport costs (i.e. s ( t I t II ) ) relocation is total, that is all production is moved abroad when country I enacts unilaterally a more stringent climate policy. Instead, with high transport costs ( s ( t I t II ) ) relocation may be total or partial. Proof: It is straightforward to show that (9) 10
TR PR 4 ˆ 1 ˆ 1 s( t I t II ) ( A t I ) G1, h (10) 9b Since G 0 , a sufficient condition for the expression in (10) to be strictly positive is 1, h TR PR that s ( t I t II ) . On the other hand, with s ( t I t II ) the condition ˆ ˆ 1 1 may hold for sufficiently high values of G 1 , h . With low transport costs, variable profits are higher with the TR than with the PR choice (the term in curly brackets is positive); this reinforces the effect of h G 1 , , leading firm 1 to relocate all production abroad. Such result is in line with the conclusions of previous studies, assuming symmetric countries and zero transport costs (i.e. a special case of the low transport cost scenario), which found that unilateral climate actions lead to total relocation of domestic production. However, we show that with symmetric countries but high transport costs, the two forces in Eq. (10) (additional variable profits versus additional fixed costs) contrast each other and thus total relocation is not anymore inevitable, as partial relocation may instead take place. not sunk) 4.2 Market size asymmetry and plant costs symmetry ( aI aII , bI bII , f h G G , 1, 1 , G i, h Let us introduce now market size asymmetry, with country I being larger than country II (i.e aI aII , bI bII ). As before, firm 1 faces the same plant fixed costs in both countries. We obtain that, if the more stringent environmental tax ( t I t II ) is imposed by the large country ( aI aII and bI bII ), the level of transport costs plays a crucial role in determining whether or not market structure will change. We could show that: Proposition III With high transport costs ( s ( t I t II ) ), if the more stringent climate policy is imposed by the large country, the probability that neither partial nor total relocation takes place increases in market asymmetry. 11
Page 1 and 2: The impact of unilateral climate po
Page 3 and 4: A related, although less policy-ori
Page 5 and 6: Furthermore, the net effect on welf
Page 7 and 8: will undertake a market-oriented FD
Page 9: ( a c 2s 2t t ) ( a c t ) G
Page 13 and 14: the influence of transport costs, w
Page 15 and 16: 4.4 Market size and plant costs asy
Page 17 and 18: ( s ( t I t II ) ), all three out
Page 19 and 20: Proposition VI The introduction of
Page 21 and 22: market asymmetry is limited, an uni
Page 23 and 24: Two sets of provisions to moderate
Page 25 and 26: identifying vulnerable sectors are
Page 27 and 28: coefficients vary across regions. T
Page 29 and 30: Appendix B Short-term boundary cond
Page 31 and 32: References Abe K, Zhao L (2005) End
Page 33 and 34: Mani M, Wheeler D (1997). In search
Page 35: Table 1 The impact of a unilateral
Page 38 and 39: 2005). As suggested by Mulatu, et a
Page 40: 38 Out of the nearly 500 six-digit

Francesca Sanna-Randaccio paper - The Business School

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