Does globalization worsen environmental quality in developed economies?

Shahbaz, Muhammad and Syed, Jawad and Kumar, Mantu and Hammoudeh, Shawkat (2017): Does globalization worsen environmental quality in developed economies? Published in: : pp. 1-40.

Abstract

We examine the causal relationship between globalization and CO2 emissions for 25 developed economies in Asia, North America, Western Europe and Oceania using both time series and panel data techniques, spanning the annual data period of 1970–2014. Because of the presence of cross-sectional dependence in the panel, we employ Pesaran’s (2007) cross-sectional augmented panel unit root (CIPS) test to ascertain unit root properties. The Westerlund (2007) cointegration test is also used to ascertain the presence of a long-run association between globalization and carbon emissions. The long-run heterogeneous panel elasticities are estimated using the Pesaran (2006) common correlated effects mean group (CCEMG) estimator and the Eberhardt and Teal (2010) augmented mean group (AMG) estimator. The causality between the variables is examined by employing the Dumitrescu and Hurlin (2012) and Emirmahmutoglu and Kose (2011) Granger causality tests. The empirical results reveal that globalization increases carbon emissions, and thus the globalization-driven carbon emissions hypothesis is valid. This empirical analysis suggests insightful policy guidelines for policy makers using ‘globalization’ as an economic tool for better long-run environmental policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Carbon Emissions, Causality, Globalization
• Subjects: A - General Economics and Teaching > A1 - General Economics > A10 - General

References

Agénor, P. R. (2004). Does globalization hurt the poor? International Economics and Economic Policy, 1(1), 21-51.

Antweiler, W., Copeland, B. R. and Taylor, M. S. (2001). Is Free Trade Good for the Environment? American Economic Review, 91(4), 877-908.

Baek, J., Cho, Y. and Koo, W. W. (2009). The environmental consequences of globalization: A country-specific time-series analysis. Ecological Economics, 68(8), 2255-2264.

Baltagi, B. H., Feng, Q. and Kao, C. (2012).A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model. Journal of Econometrics, 170(1), 164-177.

Breitung, J. (2005). A parametric approach to the estimation of cointegration vectors in panel data. Econometric Reviews, 24, 151-173.

Breusch, T. and Pagan, A. (1980).The LM test and its application to model specification in econometrics. Review of Economic Studies, 47, 239-254.

Chang, N. (2012). The empirical relationship between openness and environmental pollution in China. Journal of Environmental Planning and Management, 55(6), 783-796.

Christmann, P. and Taylor, G. (2001). Globalization and the environment: Determinants of firm self-regulation in China. Journal of International Business Studies, 439-458.

Cole, M. A., Elliott, R. J. and Zhang, J. (2011). Growth, foreign direct investment, and the environment: Evidence from Chinese cities. Journal of Regional Science, 51(1), 121-138.

Copeland, B. R. (2005). Policy endogeneity and the effects of trade on the environment. Agricultural and Resource Economics Review, 34(1), 1-15.

Copeland, B. R. and Taylor, M. S. (1994). North-South trade and the environment. The Quarterly Journal of Economics, 109(3), 755-787.

Copeland, B. R. and Taylor, M. S. (2003). Trade and the Environment, Princeton University Press, Princeton, NJ.

Copeland, B. R. and Taylor, M. S. (2004). Trade, Growth, and the Environment. Journal of Economic Literature, 42, 7-71.

Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied Economics, 38, 1091-1110.

Dumitrescu, E-I. and Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29, 1450-1460.

Eberhardt, M., & Teal, F. (2010). Productivity analysis in global manufacturing production. Department of Economics, University of Oxford.

Emirmahmutoglu, F. and Kose, N. (2011). Testing for Granger causality in heterogeneous mixed panels. Economic Modelling, 28, 870-876.

Engle, R. F. and Granger, C. W. J. (1987). Co-integration and error-correction: Representation, estimation and testing. Econometrica, 55, 251-276.

Granger, C. W. J. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica, 37, 424-438.

Groen, J. J. J. and Kleibergen, F. (2003). Likelihood-based cointegration analysis in panels of vector error-correction models. Journal of Business & Economic Statistics 21, 295-318.

Grossman, G. M. and Krueger, A. B. (1991). Environmental impacts of a North American free trade agreement (No. w3914). National Bureau of Economic Research, Cambridge, MA.

Grossman, G. M. and Krueger, A. B. (1995). Economic Growth and the Environment. Quarterly Journal of Economics, 110(2), 353-377.

Hawken, P., Lovins, A. and Lovins, H. (2008). Natural capitalism: Creating the next industrial revolution. Boston, MA: Back Bay Books.

Heckscher, E. (1919). The effect of foreign trade on the distribution of income. Ekonomik Tidskrift 31. Reprinted in readings in the theory of international trade, edited by the American Economic Association.

Helpman, E. (1998). Explaining the structure of foreign trade: where do we stand. Review of World Economy, 134(4), 573-589.

Im, K.S., Lee, J. and Tieslau, M. (2005). Panel LM Unit Root Tests with Level Shifts. Oxford Bulletin of Economics and Statistics, 67, 393-419.

Jayadevappa, R. and Chhatre, S. (2000). International trade and environmental quality: a survey. Ecological Economics, 32(2), 175-194.

Jena, P. R. and Ulrike, G. (2008). Growth-trade-environment nexus in India.https://www.econstor.eu/handle/10419/39895. Tidskr., 497–512 (Translated as chapter 13 in American Economic Association, Readings in the Theory of International Trade, Philadelphia: Blakiston,1949,272–300, and a new translation is provided in Flam and Flanders).

Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-80.

Johansen, S. (1988). Statistical analysis of cointegration vectors. Journal of Economic and Control, 12, 231-254.

Kanjilal, K. and Ghosh, S. (2013). Environmental Kuznets curve for India: Evidence from tests for cointegration with unknown structural breaks. Energy Policy, 56, 509-515.

Kao, C. (1999). Spurious regression and residual based tests for cointegration in panel data. Journal of Econometrics, 90, 1-44.

Kuznets, S. (1955). Economic growth and income inequality. The American Economic Review, 45(1), 1-28.

Larsson, R., Lyhagen, J. and Lothgren, M. (2001). Likelihood-based cointegration tests in heterogeneous panels. Econometrics Journal, 4, 109-142.

Lean, H. H., & Smyth, R. (2010). CO2 emissions, electricity consumption and output in ASEAN. Applied Energy, 87(6), 1858-1864.

Lee, KI-H.and Min, B. (2014). Globalization and Carbon Constrained Global Economy: A Fad or a Trend? Journal of Asia-Pacific Business, 15(2), 105-121.

Ling, C. H., Ahmed, K., Muhamad, R. B. and Shahbaz, M. (2015). Decomposing the trade-environment nexus for Malaysia: what do the technique, scale, composition, and comparative advantage effect indicate? Environmental Science and Pollution Research, 22(24), 20131-20142.

Machado, G. V. (2000). Energy use, CO2 emissions and foreign trade: an IO approach applied to the Brazilian case. In Thirteenth international conference on input–output techniques, Macerata, Italy (pp. 21-25).

Managi, S. (2004). Trade liberalization and the environment: carbon dioxide for 1960-1999. Economics Bulletin, 17(1), 1-5.

Managi, S. and Jena, P. R. (2008). Environmental productivity and Kuznets curve in India. Ecological Economics, 65(2), 432-440.

McCarney, G. R. and Adamowicz, W. L. (2006). The Effects of Trade Liberalization of the Environment: An Empirical Study. In 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia (No. 25297). International Association of Agricultural Economists.

Ohlin, B. (1933). Interregional and International Trade. Cambridge University Press, Harvard, MA.

McCoskey, S. and Kao, C. (1998).A residual-based test of the null of cointegration in panel data. Econometric Reviews 17, 57-84.

Paramati, S. R., Ummalla, M. and Apergis, N. (2016). The effect of foreign direct investment and stock market growth on clean energy use across a panel of emerging market economies. Energy Economics, 56, 29-41.

Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Working Paper, Indiana University, July 25, 1999a, pp.1-19.

Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967-1012.

Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics 22, 265-312.

Pesaran, M. H., Ullah, A. and Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal 11, 105-127.

Pesaran, M. H. and Yamagata, T. (2008). Testing slope homogeneity in large panels. Journal of Econometrics 142, 50-93.

Runge, C.F. (1994). Freer Trade, Protected Environment. Council on Foreign Relations Press, New York.

Saboori, B., Sulaiman, J. and Mohd, S. (2012). Economic growth and CO2 emissions in Malaysia: a cointegration analysis of the environmental Kuznets curve. Energy Policy, 51, 184-191.

Shafik, N. and Bandyopadhyay, S. (1992). Economic growth and environmental quality: time-series and cross-country evidence (Vol. 904). World Bank Publications.

Shahbaz, M., Lean, H. H. and Shabbir, M. S. (2012). Environmental Kuznets curve hypothesis in Pakistan: cointegration and Granger causality. Renewable and Sustainable Energy Reviews, 16(5), 2947-2953.

Shahbaz, M., Hye, Q. M. A., Tiwari, A. K. and Leitão, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25, 109-121.

Shahbaz, M., Bhattacharya, M. and Ahmed, K. (2015b). Growth-globalization-emissions nexus: the role of population in Australia. Department of Economics Discussion Paper Series (Discussion Paper 23-15). Monash University.

Shahbaz, M., Mallick, H., Mahalik, M. K. and Loganathan, N. (2015a). Does globalization impede environmental quality in India? Ecological Indicators, 52, 379-393.

Shin, S. (2004). Economic globalization and the environment in China: a comparative case study of Shenyang and Dalian. The Journal of Environment & Development, 13(3), 263-294.

Solarin, S. A. (2014). Tourist arrivals and macroeconomic determinants of CO2 emissions in Malaysia. Anatolia, 25(2), 228-241.

Stine, R. A. (1987). Estimating properties of autoregressive forecasts. Journal of the American statistical association, 82(400), 1072-1078.

Swamy, P. A. (1970). Efficient inference in a random coefficient regression model. Econometrica: Journal of the Econometric Society, 311-323.

Tiwari, A. K., Shahbaz, M. and Hye, Q. M. A. (2013). The environmental Kuznets curve and the role of coal consumption in India: cointegration and causality analysis in an open economy. Renewable and Sustainable Energy Reviews, 18, 519-527.

Toda, H.Y. and Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics 66, 225-250.

Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics 69, 709-748.