Polluting firms' location choices and pollution havens in an R&D-based growth model for an international emissions trading market

We investigate the effect of grandfathered permit allocation and abatement productivity for carbon emissions on growth rate, firms' location choices, foreign direct investment, and total pollution in an agglomeration model with innovation. We consider grandfathered permit allocation as potential rent. We find a distribution effect wherein increasing (decreasing) permit price raises (reduces) firms' rent, thereby stimulating (inhibiting) R&D and the growth rate. Decreasing the permit level (improving abatement productivity) prompts firms to locate from the South (North) to the North (South) in the long run via this effect. Thus, our results imply that improving abatement productivity leads to support of the pollution haven hypothesis.