Global Policy Spillovers: How Environmental Policies Propagate through Product Attributes

About this event

In a globalized economy, a country’s domestic policies can generate global spillovers when it affects the products designed and manufactured by multinational firms. Standard economic analyses typically abstract from this channel, potentially leading to an understatement of policy impacts. We study this phenomenon in the context of environmental regulation in the automobile market. We provide empirical evidence that a fuel economy subsidy in Japan led to significant improvements in the fuel economy of vehicles sold in the U.S., thereby generating additional environmental benefits. We then develop a model of multinational automobile markets that features cross-market cost complementarity to model global spillovers. Using the model estimated for Japan and the U.S., we conduct counterfactual policy simulations to quantify the environmental benefits and welfare effects of policy in one country that causes global spillovers. Accounting for these spillovers is substantive in our case: a majority of greenhouse gas emissions reductions from the Japanese policy occurred in the United States.