Pollution haven hypothesis of domestic trade in China: A perspective of SO₂ emissions

Domestic trade flourishes with economic development and the spatial separation of production and consumption. Therefore, the prosperity of trade is accompanied by the transfer of pollution from the demand side to the supply side, which could potentially worsen the environmental quality of the supply side. Despite a large number of studies on the pollution haven hypothesis in international trade, little attention has been paid to testing the hypothesis in domestic trade. Here, combining a multiregional input-output analysis and a gravity model of trade in China, we provide an empirical test to address this problem for the first time. We also assess the factors affecting the SO₂ emissions embodied in trade, including population, economic development, coal consumption, distance, and environmental regulations. We found that domestic trade contributed approximate one third of the total SO₂ emissions in China, and interprovincial transfers of SO₂ embodied in trade were significantly determined by the population, economic development, coal consumption of the trade pairs, as well as their distance. SO₂ emission mitigation policies, such as emission reduction target and sulfur dioxide control zone, has a more significant influence on the direct transfer of SO₂ emission via direct bilateral trade, while their effects were largely offset by indirect trade (through third-party transfers). Our results do not support the pollution haven hypothesis existed in domestic trade in China during 2007-2012. Our paper sets an example and provides a reference for the domestic pollution transfer problem from an econometric perspective. Further attempts on testing pollution haven hypothesis in consideration of various pollutants are still needed to arrive at a robust conclusion.