Analyzing the impact of foreign direct investment on carbon emission using the computable general equilibrium approach

Document Type : Scientific paper

Authors

1 Economic dept, management and economic faculty, Shahid bahonar university of Kerman, Iran

2 Economic dept/management an aconomic faculty /Shahid Bahonar university of Kerman/Iran

10.22080/mrl.2025.28232.2137

Abstract

Rapid economic growth and increased foreign direct investment in various countries have raised concerns about the environmental consequences of this trend. In this study, two opposing theories on the environmental effects of FDI are examined. First, the "pollution haven" theory, which states that developed countries transfer their polluting industries to developing countries with more lax environmental laws, thereby reducing the quality of the environment in these countries. Second, the "pollution halo" theory, which believes that the inflow of foreign direct investment can help improve the quality of the environment in developing countries and reduce the emission of pollutants through the transfer of cleaner technologies and increased productivity. In order to evaluate these theories, the computable general equilibrium model and the GTAP 11 database, which includes a comprehensive set of global economic data such as international input-output tables, trade, macroeconomic and energy data, are used. In this study, the impact of foreign direct investment from OECD member countries on carbon emissions in Iran, other members of the Shanghai Cooperation Organization, OECD countries, and other parts of the world has been examined. For this purpose, two shock scenarios of 20% and 100% increase in FDI have been designed and their effects on carbon emissions have been compared. The research findings confirm "pollution haven" and show that in countries with weaker environmental laws, including Iran, an increase in FDI increases carbon emissions proportionally, because polluting industries are attracted to these countries due to less costs and lower legal restrictions. In contrast, in OECD countries that have stricter environmental standards, an increase in FDI has been associated with a relative decrease in carbon emissions, which indicates the attraction of investment in less polluting industries.

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History

  • Receive Date: 21 December 2024
  • Revise Date: 03 March 2025
  • Accept Date: 08 April 2025

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