Productivity Growth, Decoupling and Pollution Leakage

This paper examines the issue of decoupling economic growth and pollution through growth driven by productivity improvements; and the extent to which pollution effects spill over national borders. Focus is widened from conventional production measures of pollution to a consumption accounting principle (carbon footprints). This adds a useful dimension to understanding pollution leakage effects. Using an interregional empirical general equilibrium framework, we consider the impacts of productivity growth in one region in that region and a neighbour linked through trade in goods and services and in the factor of production that is targeted with the productivity improvement (here through interregional migration of labour). The key finding is that while economic growth resulting from the productivity improvement in one region is accompanied by increased absolute pollution levels across both regions, positive competitiveness effects lead to a reduction in imports and pollution embodied therein to both regions from the rest of the world.