North-south trade and industry-specific pollutants

This paper investigates the production and pollution patterns arising from trade between high- and low-income countries when firms discharge industry-specific pollutants. We extend the common pollutant model of Copeland and Taylor [North-South trade and the environment, Quart. J. Econ. 109 (1994) 755-787] to incorporate industry-specific pollutants and obtained a diversified equilibrium, which differs markedly from the complete specialization equilibrium obtained in the original model. With diversified production, individual countries' shares of production and emissions change in a flexible manner, reflecting the competitiveness of their products in the world market. This result makes it easier for empirical studies to test the theoretical relationships between industrial production/emissions and the different attributes of countries, including income and factor endowment. Despite the striking difference in the equilibrium patterns of production and emissions, the prediction of the Pollution Haven Hypothesis is retained and pollution-intensive industries relocate to South. Finally, a composite of pollutants weighted by disutilities increases in South and decreases in North. (c) 2007 Elsevier Inc. All rights reserved.