Countries with tighter climate policies losing foreign investment to emerging markets 

Central Bank report found that Ireland was more immune to carbon leakages than other advanced economies due to its reliance on pharmaceutical giants, who are less likely to react to climate policy shocks

The Central Bank found that pharmaceutical giants were less likely to react to climate policy shocks, which it said was most likely due to the presence of high fixed costs and the highly specialised production processes in their business model. 

Large manufacturing multinationals are relocating away from countries with tighter climate policies and instead looking to emerging markets with more relaxed laws, a study by the Central Bank of Ireland has found. 

In a study by bank staff, researchers documented moves by multinationals that align with the 'carbon leakage' phenomenon, which occurs when companies relocate production to countries with weaker climate policies, leading to an increase in global greenhouse gas emissions.

However, staff at the regulator found that Ireland was less exposed to the risk of multinationals leaving in response to tighter climate policies due to the proportion of pharmaceutical multinationals operating within the State. 

The Central Bank found that pharmaceutical giants were less likely to react to climate policy shocks, which it said was most likely due to the presence of high fixed costs and the highly specialised production processes in their business model. 

The regulator also highlighted the "major role" being played in Ireland by multinationals in the pharmaceutical sector and in the manufacturing of computer and electronic equipment, with the Irish operations of these companies accounting for only a "small share" of the firm's global carbon footprint.

Policy changes 'unlikely' to impact Irish pharma

"Marginal changes in the Irish or EU carbon tax regime are therefore unlikely to represent a material cost increase for the multinationals driving Ireland’s inward foreign direct investment," Central Bank staff said.

The regulator also pointed to Ireland's unique selling points as a reason for its enhanced immunity to carbon leakages, outlining features of the economy such as the tax policy certainty, skilled workforce and access to the EU single market, which "might be overweighting the direct costs of environmental policies." 

"The relevance in the Irish foreign direct investment landscape of pharmaceutical multinationals, along with the relatively lower carbon intensity of the sectors of the economy most exposed to FDI, are plausible explaining factors," the Central Bank reported.

On a global level, the study found a consistent negative impact for foreign direct investment in countries with more ambitious climate policies, with the effects stronger in countries where multinationals hold affiliates from the most polluting manufacturing sectors. 

It reported that an average yearly change in policy tightness, corresponding to two additional climate policies being enacted, leads to a decrease of 0.06% in the share of FDI held in the target country experiencing that policy tightening.

Central Bank staff also found that multinationals increase the size of its affiliates in emerging markets, which comprise countries with typically more lenient climate policies. The effects of this, the regulator said, was "highly persistent," being found up to four years after the initial climate policy shocked. For advanced economies, this resulted in a more gradual decrease in both assets and employment.