This paper develops a dynamic model of investment in environmental abatement technology (EAT) and exports with heterogeneous firms. We generally refer to investment in EAT as all actions taken to minimize environmental impacts both in the domestic and export markets. For example, these expenditures include actions taken to reduce waste, certify products which meet foreign environmental standards, improve environmental sustainability practices, and upgrade product characteristics that may a ect the environment both during and after its nal use.
The model emphasizes how firms current investment in environmental abatement technology or export decisions influence the evolution of the distribution of abatement and exports over time. The model is estimated using Indonesian manufacturing data and counterfactual policy experiments are used to assess the policy implications of trade and environmental regulation.
There is a long tradition linking international trade with environmental outcomes, particularly in developing countries. For example, Copeland and Taylor (1994, 1995) argue that international trade may be particularly likely to increase pollution in countries that have a comparative advantage in pollution-intensive industries. Numerous papers cast doubt on the hypothesis that freer international markets will create pollution havens like Antweiler, Copeland and Taylor (2001) who argue that free trade generally tends to decrease pollution across countries.
In particular, they nd that when trade increases income by 1 percent, pollution concentrations tend to fall by 1 percent, largely driven by improvements in production techniques. In contrast, Ederington, Levinson and Minier (2005) argue that when we examine trade between developed and developing countries, there are often signi cant effects in mobile industries with large abatement costs. We contribute to this literature by examining environmental abatement and exporting activities across heterogeneous firms and characterizing their behavior across industries.
