A new and accurate approach to the Co2 haven hypothesis: The experience of the European Union and China

Abstract

The pollution haven hypothesis (PHH) is defined as follows: A reduction in trade costs results in production of pollution-intensive goods shifting towards countries with easier environmental laws. The previous studies examined this hypothesis in the form of Kuznets' environmental hypothesis. In this way, they test the effect of foreign direct investment (FDI) on carbon emissions. However, this study investigates PHH from a new perspective. I will use Newton's gravity model to test this hypothesis. The basis of PHH is the difference in the environmental standards of the two business partners. One of the indicators used to measure the severity of a country's environmental laws is carbon emission intensity. The stricter the country's laws are, the lower the index value will be. In order to test the hypothesis, experimental data from China and OECD countries are used. China was as the pollution haven for the countries of the Organization for Economic Cooperation and Development. I found that environmental laws of host and guest countries have different effects on FDI. In addition, transportation costs have a negative effect on the FDI flow. Finally, the research results confirm the hypothesis on gravity model.