Unilateral Environmental Policy and International Competitiveness

One of the most discussed topics in the public debate is whether international competitiveness may be increased by stricter environmental policy in only one country. On the one hand, environmental policy is assumed to raise international competitiveness and thus welfare by inducing factor substitution and innovations, which raise productivity and contribute to a long-run cost decrease. On the other hand, environmental policy is supposed to lead to cost increases and to induce capital flight into jurisdictions with softer environmental standards, and ultimately to a decrease in international competitiveness and welfare. The authors contribute to a better understanding of the cases for which a positive influence of environmental policies on competitiveness can be expected. It is shown that a positive influence is theoretically possible under restrictive assumptions. However, it is also demonstrated that there is no empirical evidence which supports such assumptions.