Trade Openness and Carbon Emissions: Evidence from Central and Eastern Europe

Njindan Iyke, Bernard and Ho, Sin-Yu (2017): Trade Openness and Carbon Emissions: Evidence from Central and Eastern Europe.

Abstract

Using a composite trade share measure of trade openness, we examined the effects of trade openness on carbon dioxide emission for a sample of 17 Central and Eastern European (CEE) countries over the period 1994 to 2014. We found that high trade openness is associated with low carbon emission in the long run. When compared with the simple measure of trade openness (i.e. total trade as a percentage of GDP), the composite measure indicates that the effect of openness on carbon emission in the long run is smaller in absolute terms. Moreover, while high openness is associated with high emission in the short run using the simple measure, this association is non-existent when using the composite measure. These findings are robust to two historically closed economies and the recent Global Financial Crisis. When testing the Environmental Kuznets Curve (EKC) hypothesis using the composite measure, we found evidence in support of this in the long run. This finding connotes that high openness is associated with low emission in the long run, but up to a certain level of openness. That is, there is a turning point for openness beyond which further openness may spur high emission. Overall, our findings clearly suggest, to a large extent, that the measure of trade openness matters.

• Item Type: MPRA Paper
• Language: English
• Keywords: Measuring Trade Openness; Carbon Emissions; Central and Eastern Europe.
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth

References

Ahmed, K., Shahbaz, M. & Kyophilavong, P. (2016). Revisiting the emissions-energy-trade nexus: evidence from the newly industrializing countries. Environmental Science and Pollution Research, 23(8), 7676-7691.

Al-Mulali, U., Saboori, B. & Ozturk, I. (2015). Investigating the environmental Kuznets curve hypothesis in Vietnam. Energy Policy, 76, 123-131.

Alcalá, F. & Ciccone, A. (2004). Trade and Productivity. Quarterly Journal of Economics, 119(2), 613–46.

Anderson, K. & Nelgen, S. (2012). Agricultural trade distortions during the global financial crisis. Oxford Review of Economic Policy, 28(2), 235-260.

Andonova, L. B. (2003). Openness and the environment in Central and Eastern Europe: Can trade and foreign investment stimulate better environmental management in enterprises? The Journal of Environment and Development, 12(2), 177-204.

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

Anderson, J. E. & Neary, J. P. (1992). Trade reform with quotas, partial rent retention, and tariffs. Econometrica, 60(1), 57-76.

Bombardini, M. & Li, B. (2016). Trade, pollution and mortality in china. National Bureau of Economic Research, Working Paper No. 22804.

Catao, L. A. & Solomou, S. N. (2005). Effective exchange rates and the classical gold standard adjustment. The American Economic Review, 95(4), 1259-1275.

Catao, L. A. & Terrones, M. E. (2005). Fiscal deficits and inflation. Journal of Monetary Economics, 52(3), 529-554.

Cavallo, E.A. & Frankel, J.A. (2008). Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality. Journal of International Money and Finance, 27(8), 1430-1452.

Chang, R., Kaltani, L. & Loayza, N. V. (2009). Openness can be good for growth: The role of policy complementarities. Journal of Development Economics, 90(1), 33-49.

Cherniwchan, J., Copeland, B. R. & Taylor, M. S. (2017). Trade and the Environment: New Methods, Measurements, and Results. Annual Review of Economics. https://doi.org/10.1146/annurev-economics-063016-103756

Chintrakarn, P. & Millimet, D. L. (2006). The Environmental Consequences of Trade: Evidence from Subnational Trade Flows. Journal of Environmental Economics and Management, 52(3), 430–53.

Chor, D. & Manova, K. (2012). Off the cliff and back? Credit conditions and international trade during the global financial crisis. Journal of International Economics, 87(1), 117-133.

Chudik, A., Mohaddes, K., Pesaran, M. H. & Raissi, M. (2017). Is there a debt-threshold effect on output growth? Review of Economics and Statistics, 99(1), 135-150.

Cole, M. A. (2004). Trade, the pollution haven hypothesis and the environmental Kuznets curve: examining the linkages. Ecological economics, 48(1), 71-81.

Copeland, B. R., & Taylor, M. S. (1995). Trade and transboundary pollution. The American Economic Review, 85(4), 716-737.

Copeland, B. R. & Taylor, M. S. (2005). Free trade and global warming: a trade theory view of the Kyoto protocol. Journal of Environmental Economics and Management, 49(2), 205-234.

Dean, J. M. (2002). Does trade liberalization harm the environment? A new test. Canadian Journal of Economics/Revue Canadienne D'économique, 35(4), 819-842.

Dinda, S. (2004). Environmental Kuznets curve hypothesis: a survey. Ecological economics, 49(4), 431-455.

Dollar, D. & Kraay, A. (2003). Institutions, trade, and growth. Journal of Monetary Economics, 50(1), 133-162.

Edwards, S. (1998). Openness, Productivity and Growth: What Do We Really Know? Economic Journal, 108(447), 383-98.

Frank, M. W. (2009). Inequality and growth in the United States: Evidence from a new state‐level panel of income inequality measures. Economic Inquiry, 47(1), 55-68.

Frankel, J. A. (2009). Environmental Effects of International Trade. Faculty Research Working Paper Series No. RWP09-006 (Cambridge, MA: Harvard University).

Frankel, J. A. & Rose, A. (2005). Is Trade Good or Bad for the Environment? Sorting out the Causality. The Review of Economics and Statistics, 87(1), 85–91.

Fratzscher, M. (2012). Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), 341-356.

Grossman, G. M. & Krueger, A. B. (1991). Environmental impacts of a North American free trade agreement. National Bureau of Economic Research, Working Paper No. 3914.

Harrison, A. (1996). Openness and growth: A time-series, cross-country analysis for developing countries. Journal of Development Economics, 48(2), 419-447.

Hossain, M. S. (2011). Panel estimation for CO 2 emissions, energy consumption, economic growth, trade openness and urbanization of newly industrialized countries. Energy Policy, 39(11), 6991-6999.

Iyke, B. N. (2017). Does Trade Openness Matter for Economic Growth in the CEE Countries? Review of Economic Perspectives, 17(1), 3-24.

Jaffe, A. B., Peterson, S. R., Portney, P. R. & Stavins, R. N. (1995). Environmental regulation and the competitiveness of US manufacturing: what does the evidence tell us? Journal of Economic Literature, 33(1), 132-163.

Jalil, A. & Mahmud, S. F. (2009). Environment Kuznets curve for CO 2 emissions: a cointegration analysis for China. Energy Policy, 37(12), 5167-5172.

Kim, D. H. & Lin, S. C. (2010). Dynamic relationship between inflation and financial development. Macroeconomic Dynamics, 14(03), 343-364.

Krueger, A. O. (1978), Liberalization Attempts and Consequences, Cambridge: Ballinger.

Lau, L. S., Choong, C. K. & Eng, Y. K. (2014). Investigation of the environmental Kuznets curve for carbon emissions in Malaysia: do foreign direct investment and trade matter? Energy Policy, 68, 490-497.

Leamer, E. E. (1988). “Measures of Openness,” NBER Chapters, in: Trade Policy Issues and Empirical Analysis, 145-204. National Bureau of Economic Research.

Lee, H. Y., Ricci, L. A. & Rigobon, R. (2004). Once Again, Is Openness Good for Growth? Journal of Development Economics, 75(2), 451–472.

Levinson, A. (2009). Technology, international trade, and pollution from US manufacturing. The American Economic Review, 99(5), 2177-2192.

Ling, C. H., Ahmed, K., Muhamad, R. B. & 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.

Loayza, N. & Ranciere, R. (2006). Financial development, financial fragility, and growth. Journal of Money, Credit and Banking 38(4), 1051–1076.

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

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

Managi, S., Hibiki, A. & Tsurumi, T. (2009). Does trade openness improve environmental quality? Journal of Environmental Economics and Management, 58(3), 346-363.

Martin, P. & Wheeler, D. (1992). Prices, policies, and the international diffusion of clean technology: The case of wood pulp production. World Bank Discussion Papers (World Bank Discussion Paper). 1992.

Milesi-Ferretti, G. M. & Tille, C. (2011). The great retrenchment: international capital flows during the global financial crisis. Economic Policy, 26(66), 289-346.

Nannicini, T. & Billmeier, A. (2011). Economies in transition: How important is trade openness for growth? Oxford Bulletin of Economics and Statistics, 73(3), 287-314.

Nasir, M. & Rehman, F. U. (2011). Environmental Kuznets curve for carbon emissions in Pakistan: an empirical investigation. Energy Policy, 39(3), 1857-1864.

Omri, A. (2013). CO2 emissions, energy consumption and economic growth nexus in MENA countries: evidence from simultaneous equations models. Energy Economics, 40, 657-664.

Ozturk, I. & Acaravci, A. (2013). The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36, 262-267.

Panayotou, T. (1993). Empirical tests and policy analysis of environmental degradation at different stages of economic development (No. 992927783402676). International Labour Organization.

Pesaran, M. H., Shin, Y. & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.

Pesaran, M. H. & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68(1), 79-113.

Peters, G. P., Marland, G., Le Quéré, C., Boden, T., Canadell, J. G. & Raupach, M. R. (2012). Rapid growth in CO2 emissions after the 2008-2009 global financial crisis. Nature Climate Change, 2(1), 2-4.

Pritchett, L. (1996). Measuring Outward Orientation in the LDCs: Can It Be Done? Journal of Development Economics, 49(2), 309–55.

Reppelin-Hill, V. (1999). Trade and environment: An empirical analysis of the technology effect in the steel industry. Journal of Environmental Economics and Management, 38(3), 283-301.

Shafik, N. (1994). Economic development and environmental quality: an econometric analysis. Oxford Economic Papers, 46(October), 757-773.

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

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

Shahbaz, S. J. H., Kumar, R. R., Zakaria, M. & Hurr, M. (2017). Carbon emission, energy consumption, trade openness and financial development in Pakistan: A revisit. Renewable and Sustainable Energy Reviews, 70, 185-192.

Shahzad, S. J. H., Kumar, R. R., Zakaria, M. & Hurr, M. (2017). Carbon emission, energy consumption, trade openness and financial development in Pakistan: A revisit. Renewable and Sustainable Energy Reviews, 70, 185-192.

Soytas, U., Sari, R. & Ewing, B. T. (2007). Energy consumption, income, and carbon emissions in the United States. Ecological Economics, 62(3), 482-489.

Squalli, J. & Wilson, K. (2011). A New Measure of Trade Openness. The World Economy, 34(10), 1745-1770.

Takeda, F. & Matsuura, K. (2006). Trade and the Environment in East Asia: Examining the Linkages with Japan and the USA. The Journal of the Korean Economy, 7(1), 33-56.

Wacziarg, R. & Welch, K. H. (2003). Trade Liberalization and Growth: New Evidence, NBER Working Paper 10152, National Bureau of Economic Research, Cambridge, MA.

Wacziarg, R. & Welch, K. H. (2008). Trade liberalization and growth: new evidence. World Bank Economic Review, 22(2), 187–231.

World Bank (2008). Unleashing Prosperity: Productivity Growth in Eastern Europe and the Former Soviet Union. World Bank Documents, Washington (2008), p. 42 available at:http://siteresources.worldbank.org/ECAEXT/Resources/publications/UnleashingProsperity.pdf

Yanikkaya, H. (2003). Trade openness and economic growth: a cross-country empirical investigation. Journal of Development Economics, 72(1), 57-89.