Academic journal article International Advances in Economic Research

Long-Term Nexus between Openness, Income, and Environmental Quality

Academic journal article International Advances in Economic Research

Long-Term Nexus between Openness, Income, and Environmental Quality

Article excerpt

Abstract In this paper we examine the dynamic relationship between income, trade, and environmental quality as measured by carbon dioxide ([CO.sub.2]) emissions, disaggregated by source (oil, gas, and coal). Using time series data spanning from 1980 to 2006, 21 countries, including G7, BRIC, and middle and low income economies, we consistently find the existence of a long-run relationship between income, trade, and carbon emissions (from oil in particular). This is important because the Environmental Protection Agency (EPA) recently determined that [CO.sub.2] emissions indeed pose a threat to human health and welfare.

Keywords Trade * Environment * Development * Air pollution * Panel cointegration

Introduction

Economic theory suggests that increased trade induces economic growth, which in turn promotes economic development. This relationship has been extensively tested in the field. Frankel and Romer (1999), for example, found a positive relationship between trade and income in a cross section of 150 countries. Using time series data between 1960 and 1995, Feyrer (2009) established that differences in predicted trade growth could explain about 17% of the variation in cross country income growth. Results from Rassekh (2007) suggested that benefits from international trade occur more for lower income economies than higher income economies.

Understanding the long-term relationship between trade, income and development is important, as it often leads to conclusions regarding the impact that increased economic activity has on the environment. The empirical model known as the Environmental Kuznet Curve (EKC) predicts that a country's economic development is first accomplished at the expense of environmental quality. It is then anticipated that this negative relationship between development and environment is reversed, and that, after reaching a certain average income level, further economic growth contributes to improving the state of the environment. Some studies have concentrated on analyzing how countries' environmental quality changed as per capita income levels increased (GDP per capita). The analysis was performed using both cross-sectional and time series data over a wide range of pollutants. Overall, findings suggest that the EKC phenomenon only occurs for some types of pollutants (List and Gallet 1999), and the more global and long-term damaging the pollutant is, the more spurious the results are. In recent years, researchers have questioned the validity of earlier findings on statistical basis (Stern 2004; Miiller-Furstenberger and Wagnerb 2007; Galeotti et al. 2009).

Another group of studies have concentrated on the impact of increased trade or openness on environmental quality. Increased openness may lead to a specialization in dirty industries and consequently worsen environmental quality. In a recent crosscountry study, Kellenberg (2009) found robust confirmation of a pollution haven effect. Increased trade-openness was also found to be correlated with increased pollution in Managi and Kumar study (2009), looking at the impact of trade-induced technological progress on pollution, as measured by-products of carbon dioxide and sulfur dioxide emissions. The opposite finding however was reached by Faehn and Bruvoll (2009), who found little evidence of dirty industries relocating to developing countries.

Few authors, however, have looked at the long-run relationship between trade, income, and environment, and, more importantly, have questioned the direction of causation. One exception is Baek et al. (2009), who studied the dynamic long term nexus between trade, income and sulfur dioxide emissions. Their findings suggest that trade and income growth have a positive impact on environmental quality in developed countries, and a negative impact in most developing countries. Further, their analysis shows how increased trade and income growth leads to improved environmental quality for developed countries (as well as China), while for developing countries, the causal relationship between these variables is opposite that of developed countries. …

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