On the effects of unilateral environmental policy on offshoring in multi-stage production processes

We extend the literature on global supply chains by analyzing if and how unilateral environmental regulation induces offshoring. We develop an analytical model of two-stage production processes that can be distributed between two countries and investigate unilateral emission pricing and its supplementation with border carbon taxes. In contrast to existing final good models, we are able to show how impacts of regulation differ across the different stages of the supply chain, depending on the interplay of comparative advantages and general equilibrium effects. To get a more comprehensive picture, we subsequently apply a computable general equilibrium model that includes a representation of international supply chains. We find heterogeneous but mostly positive effects of a unilateral carbon emission reduction by the European Union on the degree of vertical specialization of European industries. Border taxes are successful in protecting upstream industries, but with negative side effects for downstream industries.