Does the ‘California effect’ operate across borders? Trading- and investing-up in automobile emission standards

The ‘California effect’ hypothesis posits that economic integration may lead to the ratcheting upwards of regulatory standards towards levels found in higher-regulating jurisdictions. Although a number of previous large sample quantitative studies have investigated such convergence dynamics for public environmental policies, their results have been based exclusively on geographically and sectorally aggregated data. Our contribution advances on these studies.

We provide the first large-N, geographically disaggregated evidence consistent with a trading-up effect: exports of automobiles and related components from developing countries to countries with more stringent automobile emission standards are found to be associated with more stringent domestic emission standards. Investing-up dynamics are also apparent, with aggregate inward foreign direct investment into host developing economies’ automotive sector increasing the likelihood of more stringent emission standards domestically.