Improving the Environment for a Greener Future
New Horizons in Environmental Economics series
Chapter 4: Trade Openness and Environmental Quality
INTRODUCTION The environmental effect of trade openness has been one of the most important questions in trade policy for the past 10 years (see Taylor, 2004; Copeland and Taylor, 2005). Empirical studies on the relationship between international trade openness and environmental quality have been accumulating (see, for example, Antweiler et al., 2001; Harbaugh et al., 2002; Cole and Elliott, 2003; Frankel and Rose, 2005). This study extends the literature by showing the sensitivity of results to differences between OECD and developing countries, and the dynamic adjustment process, and addressing the endogeneity problems. Antweiler et al. (2001) first provided the theoretical framework to empirically explore the determinants of emissions and to successfully decompose them into scale, technique, and composition effects. The scale effect refers to the effect of an increase in production (for example, GDP) on emissions. The technique effect indicates the negative impact of income on emission intensity. This refers to the effect of more-stringent environmental regulations, which promote the employment of more-environmentally-friendly production methods and which are put in place as additional income increases the demand for a better environment. The composition effect explains how emissions are affected by the composition of output (that is, the structure of the industry), which is determined by the degree of trade openness as well as by the comparative advantage of the country. This effect could be positive or negative, depending on the country’s resource abundance and the strength of its environmental policy. These are called the capital–labor effect (KLE) and the...