DP9111 Sources of Comparative Advantage in Polluting Industries

Author(s): Fernando A Broner, Paula Bustos, Vasco M Carvalho
Publication Date: September 2012
Keyword(s): air pollution, comparative advantage, environmental regulation, international trade
JEL(s): F11, F18, Q53, Q56
Programme Areas: International Macroeconomics, Public Economics, International Trade and Regional Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9111

We study the determinants of comparative advantage in polluting industries. We combine data on environmental policy at the country level with data on pollution intensity at the industry level to show that countries with laxer environmental regulation have a comparative advantage in polluting industries. Further, we address the potential problem of reverse causality. We propose an instrument for environmental regulation based on meteorological determinants of pollution dispersion identified by the atmospheric pollution literature. We find that the effect of environmental regulation on the pattern of trade is causal and comparable in magnitude to the effect of physical and human capital.