consistently higher coefficient for the distance coefficient for dirty industries. This, and the fact that extraction in natural-resource-based industries cannot migrate, suggests that transport costs would deter relocation of much processing to countries with lower regulation standards. So the energy-intensive polluting industries are unlikely to be footloose.<sup>14</sup> Suppose, however, that pollution-intensive industries can migrate. To fix the terms of the debate about the PHH, consider the following simple hypothetical example. Two countries, North (N) and South (S), produce two goods, a “dirty” and a (completely) “clean” good under perfect competition in a Heckscher-Ohlin framework, with pollution per unit of output of the dirty good being initially identical in N and S so that both countries are the same in all respects except that N has a higher income per capita than S. Let environmental quality be a normal good. Stricter environmental standards in N will lower emissions per unit of output and abatement costs will raise the unit price of the dirty good in N. N will then import the dirty good and hence its trade will be "embodied" with emissions (i.e. PCINS > 0),. Conversely, S will import the clean good from its partner and in this setting with no intra-industry trade PCISN = 0. The literature refers to this environmental-policy induced effect as the PH effect and to the emissions embodied in trade as “virtual trade in emissions” or as the “balance of emissions embodied in trade” (BEET). In this particular example, BEETN>0 and BEETS=0. A reduction in trade barriers, will lead S to specialize in the production of dirty products as S has a comparative advantage in dirty products due to the environmental policy in N. Globalization thus increases PCINS in conformity with the PHH (some of the previously dirty production in N is now carried out in S probably under less-stringent environmental standards). If the dirty industry is capital intensive and N is relatively well-endowed in capital, then if N and S had the same environmental policies, we would only observe a Factor endowment (FE) effect as N would have a comparative advantage in dirty products. Taking the two effects together, under the plausible assumption that the FE effect reduces the PCI and the PH effect increases it, globalization will obey the PHH if PH is positive and dominates the FE effect.

In a Heckscher-Ohlin world, increasing Foreign Direct Investment (FDI) would lead to an increase in PCINS. World trade, however, is increasingly fragmented, in great part as a result of globalization that has reduced transaction costs. Taking into account outsourcing, the presence of FDI, could however, lead to a decline in PCINS. Consider a model with a continuum of intermediates as in Feenstra and Hanson (1996) where intermediates are ranked by decreasing pollution-intensity and the location of production between N and S depends on relative production costs (inclusive of pollution taxes). As shown by Dean and Lovely (2010), FDI to the South (often directed of CO2. The coefficient of correlation between CO2 and SO2 emissions is higher than 0.9 for UK industries for the average over 1990-2000.

> 14Using  data on SO2 emission intensities Grether et al. (2009) estimate that over the period 1990-2000 SO2 emissions fell by 9.8% with a technique effect contributing to a fall by 14% while the scale effect contributed to an increase in emissions of 9.5%. Between-country shifts contributed to a reduction of 2.4% and between-sector shifts within countries to another reduction of 3%. Dean and Lovely (2010) also decompose changes in the pollution intensity (air and water) of Chinese exports and imports during 1995-2004 and find a small composition effect and a larger effect from the shift towards cleaner production processes.

13