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- Carbon leakage and energy transition: essays on foreign direct investment, sustainable development, and international tradePublication . Caetano, Rafaela Vital ; Marques, António Manuel Cardoso; Afonso, Tiago Jorge LopesThe ever-pressing quest for climate action and the consequent enlargement of environmental restrictions is reshaping current Global Value Chains (GVCs) and international trade patterns. As economic integration continues to evolve, there is evidence of international movements (investment and goods) towards the development of trade blocs with a concentration of pollution-intensive industries in developing countries, alongside significant deindustrialisation processes in many developed countries. As integration into GVCs has progressed, developing countries have found themselves further upstream, hosting polluting industries from developed countries (mainly through Foreign Direct Investment (FDI)), with the latter leading the way in climate action. But at what cost? In fact, the cost advantages emerging in developing countries are apparently coming at the expense of environmental quality. In addition, these movements have increased the external dependence of developed countries. Unprecedented global health and geopolitical crises have revealed the drawbacks of being highly integrated into GVCs. These drawbacks include the perceived concerns about countries’ sovereignty, undermined international competitiveness, and threatened fulfilment of consumer needs owing to potential supply shortages. These issues motivated the development of this thesis, which aims to gain a deeper understanding of what underpins the external dependence of developed countries and how it can be eased. To this end, seven empirical essays were developed. Environmental regulation is a widely recognised driver in the relocation of polluting industries. Why, then, does some literature support the unlikely transfer of polluting industries to developed countries? In fact, such transfers have been sustained solely based on the polluting effect of FDI in recipient countries. This thesis provides empirical evidence indicating that the pollutant impact of FDI in recipient countries is generally accompanied by an increase in the overall energy demand, predominantly supplied by non-renewable sources. Hence, to accurately evaluate the environmental impacts of FDI, an analysis of the recipient countries’ energy mix diversification should be undertaken before endorsing the transfer of industries. This thesis also sheds light on the vital role of the energy transition in recipient countries in softening the polluting impact of FDI. It should be pointed out, however, that the results reveal a potential lack of energy infrastructure in developing countries, which makes it more challenging for these countries to benefit from the energy transition.In this regard, the main findings of this thesis indicate that private participation in energy infrastructure investment encourages the energy transition in developing countries and mitigates the pollution associated with FDI. The downstream production of “environmentally friendly goods” in developed countries appears to rely on the upstream production of intermediate goods in developing countries. Additionally, the imports of intermediate goods from developing countries seem strongly encouraged by outward FDI from developed countries. These facts underline the relevance of assessing the overall environmental impact of goods from their early production (including pollution embodied in imports of intermediate goods) until their consumption. In fact, by resorting to carbon leakage, developed countries can maintain their position as leaders in climate action by polluting considerably less through production while polluting through consumption. Hence, environmental performance should cease to be exclusively measured through production-based environmental indicators. This thesis, therefore, provides empirical evidence that the external dependence of developed countries is rooted in the carbon leakage phenomenon by assessing the overall environmental impacts that might underlie the carbon leakage phenomenon, namely from the moment the investment flows out of developed countries until the moment the manufactured goods return to those economies. The energy transition has proved to have a fundamental role not only in mitigating the polluting impact of FDI in recipient countries (first, second, third, and fourth essays), but also in determining international investment and trade flows (fifth, sixth, and seventh essays). Although it may be driving carbon leakage, environmental regulation has proven to effectively reduce the external dependence of developed countries. Even though it can be considered a non-tariff barrier, enforcing environmental restrictions poses considerably low risks of trade retaliation compared to import tariffs, which are more likely to inhibit the benefits of competition. Notwithstanding, this strategy should not be exclusive; the energy transition must be pursued in parallel. The energy transition should no longer be seen merely as the substitution of fossil-fuel energy sources for renewable ones. In fact, the energy transition can trigger and entail considerable structural changes, reversing the deindustrialisation trajectory of developed countries, thus contributing to the development of robust GVCs.