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This paper studies GreenHouse-Gas (GHG) emission controls in the presence of carbon leakage through international firm relocation. The Kyoto Protocol requires developed countries to reduce GHG emissions by a certain amount. Comparing emission quotas with emission taxes, the authors show that taxes coupled with lower trade costs facilitate more firm relocations than quotas do, causing more international carbon leakage. Thus, if a country is concerned about global emissions, emission quotas would be adopted to mitigate the carbon leakage. Firm relocation entails a trade-off between trade liberalization and emission regulations.
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