Cross-Hauling of Polluting Factors

This paper analyzes the investment/environment overlap using a two stage model of two jurisdictions. Capital exports are modeled as choice variables for capital owners who weigh income considerations against the effects of capital exports on the quality of their local environments and on environmental policy. This framework reveals that capital owners have an incentive to cross-haul polluting factors across jurisdictions when direct controls are used to regulate emissions and that this cross-hauling induces policymakers to ratchet up environmental policies in both locations. The importance of instrument type and commitment on environmental policy is also analyzed.