Do pollution havens restrict tourism-led growth? Achieving sustainable tourism via a mix of environmental and tourism policies

Abstract

Using an R&D-based growth model with endogenous location choices and movement of tourists, we investigate the effect that a grandfathered emission permit and an airfare including alien tax have on international tourism. We find that improved environmental quality, achieved by the restricted allocation of grandfathered permits, leads to tourism-led growth. That is, both the number of tourists and the tourism growth rate increase. By contrast, we find that worsened environmental quality, caused by generous allocation of grandfathered permits and reduced airfares including alien tax, leads to the creation of pollution havens because the policy prompts polluting firms to relocate to the area with the respective regulations. Our findings imply sustainable tourism can be achieved when the respective environmental and tourism policies are implemented.