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The past three decades have witnessed rapid economic development, particularly in countries that have pursued relatively open economic policies. Rising environmental awareness in the 1960s also led to a rapid tightening of pollution regulation in the industrial economies. According to the "pollution havens" hypothesis, the result should have been more rapid growth of dirty industries in unregulated economies that were open to international trade. Using data for the period 1960 to 1995, the authors find that the displacement of pollution to developing countries has not been a major phenomenon for several reasons. Tendencies toward formation of pollution havens have been self-limiting because economic growth has generated countervailing effects through increases in regulation, technical expertise, and investment in cleaner production. In practice, the authors argue that pollution havens have apparently been as transient as low-wage havens.

Abstract
Stringent environmental taxes in high-income countries are assumed to drive dirty industries to low-income countries, but the empirical evidence for ``pollution havens" is surprisingly weak. We demonstrate that a government trying to prevent flight by a ``dirty" durable good monopolist can impose an effluent tax that is offset by a lump-sum subsidy so that both firm profits and host-country welfare are increased. The scheme exploits the Coase Conjecture insight: a durable goods monopolist has a time-consistency dilemma that limits its ability to restrict future output. In this environment the effluent tax provides a credible commitment that restricts future supply. We assert that the use of lump-sum subsidies in strategic location competition is consistent with this mechanism, and this paradigm may be an important piece of the ``pollution haven paradox."

AbstractThis paper re-examines the pollution haven hypothesis (PHH) by taking environmental regulation in ambient regions as a critical determinant concurrent with own regulation. Exploiting the Two Control Zones policy in China as a quasi-natural experiment, we find that both the curbing effect of the local environmental regulation and the spillover effect of ambient regions affect high-polluting foreign direct investment (FDI) location. Moreover, reallocated FDI results in redistributing instead of reducing pollutant emissions. Our evidence enriched by spatial spillover primarily supports the PHH in the context of China. It suggests a national-wide coordinated environmental policy with a unified goal performs better than separately implementing stringent regulations in highly polluted areas.