Exporting pollution: where do multinational firms release Co2?

We provide new evidence on what policy makers often call carbon leakage – where firms from highly regulated home countries locate their CO2 intensive activities abroad in countries where environmental regulation is less strict. However, the paper also documents that strict home environmental policies help reduce overall CO2 emissions. Our results indicate that while national regulations can help in the fight against climate change and pollution, there are limits as to how effective they can be individually. Only through concerted action among countries can we ensure that the overall CO2 balance will not increase. If no coordinated effort is undertaken to address climate change, large multinationals will continue to find ways to circumvent strict environmental regulations by exporting their pollution abroad.