Essays in international economics and the environment

Chapter One I consider the influence of foreign environmental policy on domestic manufacturing activity using theory and empirics. A tractable three-country spatial model yields a theory of locational com- parative advantage in the production of pollution-intensive manufactured goods: greater market access to countries with stringent environmental policy encourages output in the polluting sector. Operationalizing the model empirically, I find robust evidence that high market access to countries with stringent environmental policy increases manufacturing value added. Both the theoretical and empirical analyses suggest that estimates of the Pollution Haven Effect that ignore third country environmental policy - yet make the stable unit treatment value assumption - can be misleading. Chapter Two We investigate the impact of short-term weather and long-term climate on self-reported life satisfaction using panel data. We find robust evidence that day-to-day weather variation impacts life satisfaction by a similar magnitude to acquiring a mild disability. Utilizing two sources of variation in the cognitive complexity of satisfaction questions, we present evidence that weather bias arises because of the cognitive challenge of reporting life satisfaction. Consistent with past studies, we detect a relationship between long-term climate and life satisfaction without individual fixed effects. This relationship is not robust to individual fixed effects, suggesting climate does not directly influence life satisfaction. Chapter Three This chapter considers the related policy challenges of deindustrialisation and 'leakage' which can arise when environmental regulation is differentiated across regions. A dynamic two-region 'New Economic Geography' (NEG) model is adopted in which agglomeration forces may make firms tolerant of regulatory disadvantage. Each region ratifies an international environmental agreement (IEA) requiring it to tax transboundary pollution created by local firms. In contrast to previous NEG studies, the model adopted is considerably more tractable, enabling comparative static analysis to be conducted analytically rather than through computer simulation. The model is extended to consider the relationship between the prescribed tax rates and deindustrialisation caused by the relocation of firms. Firm relocation in response to a given tax differential depends crucially on trade costs and the initial location (configuration) of industry. For some industry configurations, agglomeration forces are strong and a set of tax differentials exist which cause no international relocation of polluting firms. For other initial industry configurations in which agglomeration forces are weaker, the same set of tax differentials may cause complete inter-national relocation to the less stringently regulated region. Trade liberalization can actually make industry less likely to relocate in response to a regulatory disadvantage. The model is further extended to consider the issue of carbon leakage, which arises in the regulation of greenhouse gas (GHG) emissions. For relatively low tax differentials, agglomeration forces create rents which tend to anchor industry in the higher taxing region, avoiding carbon leakage. If the tax differential is too great, however, agglomeration forces cause all firms to relocate to the lower taxing region where they optimally emit more GHGs. Environmental outcomes may therefore be improved by reducing the tax rate in the higher taxing region in order to discourage industry relocation. When industry is diversified between regions, firms respond to higher (lower) relative domestic taxes by increasing (decreasing) output and polluting more (less).