The influence of environmental regulation on the FDI location choice of EU ETS-covered MNEs

Filip De Beule, Nico Dewaelheyns, Frederiek Schoubben, K. Struyfs, Cynthia Van Hulle

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This paper explores how cross-country differences in environmental regulatory stringency among member states of the world's largest multinational cap-and-trade system, the European Union Emission Trading Scheme (EU ETS), influenced the FDI location choice of listed multinationals (MNEs) regulated by the environmental policy. After controlling for other country characteristics driving FDI location choice, we find that the likelihood of EU ETS-covered MNEs locating new FDI projects in less environmentally stringent member states strongly depends on firm- and industry-specific environmental characteristics during the system's first two phases. Our results are robust to different measures of environmental stringency and provide evidence for the existence of an intraregional pollution haven effect (PHE). This investment behavior by MNEs is, moreover, only found in the industries least compensated for the environmental costs induced by the policy. This suggests that the EU inadvertently promoted an intra-regional PHE not only by allowing cross-country variation in environmental stringency but also by overly focusing on and compensating for external carbon leakage risk. Our conclusions have major implications for countries and regions currently establishing or implementing an emissions trading system.

Original languageEnglish
Article number115839
Pages (from-to)1-15
Number of pages15
JournalJournal of Environmental Management
Volume321
Early online date12 Aug 2022
DOIs
Publication statusE-pub ahead of print - 12 Aug 2022

Keywords

  • BOTTOM
  • CAPABILITIES
  • Carbon leakage
  • EU ETS
  • Environmental regulation
  • FIRMS
  • FOREIGN DIRECT-INVESTMENT
  • Foreign direct investment
  • IMPACT
  • Location choice
  • MARKET ENTRY
  • PERFORMANCE
  • POLLUTION HAVEN
  • Pollution haven effect
  • STRATEGIES
  • TRADE

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