Could energy transition be a game changer for the transfer of polluting industries from developed to developing countries? An application of game theory

Developed and developing countries have made remarkable efforts to address climate action. However, some developing countries have hung on to their comparative advantage in the polluting production of goods. By applying game theory, specifically a dynamic game with incomplete information, this study examines how the transfer of polluting industries can be discouraged by increasing associated costs through carbon taxes and custom duties on polluting imports. 24 developed countries and 18 developing countries were under analysis. The main findings suggest that energy transition could play a vital role in preventing this transfer. To attract clean FDI and boost energy transition, a stricter regulatory framework through levying carbon taxes and customs duties on polluting imports is recommended as an unstable regulatory framework may deter Foreign Direct Investment but also other desirable types of investment. Policymakers should reformulate how carbon taxes are applied to maintain their deterrent effect of reducing carbon emissions.