Is Investment Leakage for the Swedish FDI-flows Caused by the EU ETS? A study examining the connection between the EU Emission Trading System and Swedish foreign direct investment flows in the iron and steel sector

Abstract

In the recent decades, the subject of a shift of emission from regions with stringent regulation to developing countries has arisen. At the same time, regulated countries such as Sweden has experienced less industrial growth. In light of this, we will explore if the implementation of the European Union Emission Trading System in 2005 has led to investment leakage in the iron and steel sector from Sweden. As the steel and iron industry is highly emission-intensive and relatively open to trade, the Pollution Haven Effect claims that environmental regulations will lead to relocation from a regulated economy to an unregulated. We perform a difference-in-differences strategy examining panel data on Swedish outward FDI flows between 1998 and 2016. Although earlier research find no evidence for a Pollution Haven Effect, this analysis points to the opposite by concluding that the EU ETS has led to investment leakage. Due to internal validity threat combined with a limited time frame, our results are drawn with caution opening for future investigations.