Competition for greener regions: environmental policy and agglomeration
This paper studies the effects of environmental policy competition among regional governments on pollution emission levels. We build a theoretical model including two regions with asymmetric agglomeration economies that implement an environmental policy fostering use of low-carbon transport mode. We show evidence of a key interplay between attractiveness, tax collection costs and aggregate pollution. A city benefiting from stronger agglomeration economies suffers from too much pollution emissions. However, fiscal competition prevents the region with lower agglomeration economies from being greener than the larger region.