Informal Emissions

Environmental regulations and their enforcement play a critical role in reducing emissions and their devastating effects on humanity and the environment. However, many developing countries have large informal sectors - accounting for more than 70 percent of total employment, that operate outside government control. The presence of the informal sector could have detrimental consequences on the environment as informal firms do not comply with regulations, which could jeopardize the effectiveness of environmental policies. The paper uses reduced form equations to estimate the relationship between both CO2 and non-CO2 emissions per value added and the informal sector measured as the share of informal workers in total across countries. The estimates indicate that emissions per value added in the informal sector are higher as opposed to in the formal sector. At the sector level, higher informality is associated with lower CO2 emissions per value added only in manufacturing and other services sectors. In particular, a one percentage point increase in the share of informal workers in total sector employment reduces the CO2 emissions per value added by 1.44 percent in manufacturing and 1.773 percent in services. This implies that the magnitude of emissions per value added in the formal sector relative to the informal sector is ambiguous. Sector-specific estimations for non-CO2 emissions yield positive significant coefficients for agriculture, trade, mining, and utilities and a negative significant coefficient for manufacturing