Trade, cluster and environmental product standard

This study investigates the impact of environmental product standards on environment and firm locations in an NEG (New Economic Geography) framework. Introducing unilateral environmental product standards and consumption externalities into a footloose capital model, we find that their effect depends on the degree of compliance of the standards and trade cost. Environmental product standards could reduce firm share and emissions in a regulated region when most firms comply with them. When the standards are not widely complied with, their effect depends on trade cost. It is possible that the unilateral standards raise the number of firms in a regulated region and worsen the environment in that region when trade cost is sufficiently small. These results could be useful for evaluating the implementation of environmental product standards as an environmental policy.