Do Foreign Trade and Investment Lead to Higher CO2 Emissions? Evidence from Cross-Country Empirical Estimates

The waves of globalisation in the past decades have increased the cross-country trade and investment flows, which also raise serious concerns over environmental sustainability and climate change owing to the following three effects. First, through scale effect the growing output and exports of the polluting sectors may adversely influence environmental balance. Secondly, growing trade volume can lead to change in industry structure and output composition resulting from composition effect, which may or may not have adverse environmental repercussions. Finally, the technique effect determines the pace of improvement in emission abatement standards and regulatory policies in an economy with rise in trade orientation. The present analysis attempts to analyse the effects of trade and investment orientation with respect to a particular climate change concern, namely per capita CO2 emissions, through panel data model for a set of 181 countries over 1980–2009. The empirical findings confirm that both in case of lower and higher income countries, higher merchandise and service trade growth leads to higher per capita CO2 emission growth in their territories. In addition, both FDI inward and outward stock is found to be positively related to CO2 emission, reflecting a complementary relationship between the two. The empirical results indicate that the composition, scale and technology effects significantly influence the openness—per capita CO2 emission interrelationship across countries.