Gry Tengmark Østenstad, USN

"Climate Policy, Trade Protectionism and Relocation of Production"

Abstract

As trade wars resurface on the global stage, climate policy enters new terrain. While coordinated global action is widely recognized as the most effective solution to curb emissions and avoid trade conflicts, political realities often lead to fragmented national policies. In response, firms can exploit regulatory differences by shifting production to regions with laxer environmental standards and more protected markets - a phenomenon that not only alters domestic industry size but also involves carbon leakage, where pollution is displaced rather than reduced. Our primary objective is to investigate the interplay between climate policy and trade protectionism, with a particular focus on the carbon leakage that arises from production relocation driven by both climate and trade policy. We develop a framework in which government objectives are shaped by two competing factions: a consumerist faction, which prioritizes protecting domestic industries from foreign competition, and a green faction, which is committed to reducing global carbon emissions. By incorporating the influence of competing political interests into our framework, we offer new insights essential for crafting effective climate policy in an era of growing geopolitical and economic fragmentation.

Contact person: Peter Kjær Kruse-Andersen