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Pollution Havens?
There is assumption that developing countries might use favorable environmental regulatory polices and lower their environmental standards to attract foreign direct investment from high-standard countries when trade is liberalized, so called “pollution heavens”. The polluting industries are likely to image from developed countries to developing countries, from richer countries to poorer countries. Furthermore, there is a chilling effect on environmental regulation, such that countries fear to raise standards because of the threat of capital outflows. Worse still, capital outflows might actually put downward pressure on existing environmental standards of the source countries: countries compete with each other in a “race to the bottom” of environmental standards to attract or keep capital. There are two strands of economic theory shows that countries have an incentive to set their environmental standards lower than optimal level to attract migratory capital to gain capital tax revenue when the international markets are imperfectly competitive. The empirical evidence, however, does not support the hypothesis of “pollution havens”. The data shows the developed countries’ share of polluting industries has remained more or less constant and has even increased marginally in the 1990s although there are of course exceptions. There are some reasons, why transnational corporations do not migrate toward countries with low environmental standards, to be given: firstly, consumer demands for environmentally friendly production; moreover, most of polluting industries are capital-intensive industries including chemical industries, pulp and paper and oil refining. Trade liberalization would tend to shift capital-intensive polluting industries towards developed countries in spite of tougher environmental regulations; thirdly, most of transnational corporations have gained ISO14000 environmental management certification.
The potential crisis of “race to bottom” and “pollution haven” still exists although the empirical evidence does not support these hypotheses. Firstly, natural resource-exploiting industries are relocating to the developing countries with less strict environmental standards and favorite regulatory policies, for example, the logging companies and opencast mining. For these natural resource-exploiting industries, the cost and benefit of them are significantly depending on whether they are required to use the nature resource, which will strengthen the incentive to relocate to the countries with less strict standards. According to the Food and Agricultural Organization (FAO), the world lost 450 million hectares of tropical forest to logging, agricultural development and human settlements between 1960 and 1990. The natural resource exploitation can have tremendous environmental consequences if adequate environmental standards are not in place. Secondly, the polluting industries relocation made determination by the share of environmental abatement cost in the overall production cost. Now in developed countries, the pollution abatement costs are no more than 1% of production costs for the average industry, rising to perhaps 5% for the worst polluters, which seems not high enough to cause any major relocation. If the environmental abatement cost keeps rising beyond a certain threshold, however, the relocation will increase dramatically.
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