Energy Policy 92 (2016) 45–55

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

Trade openness and environmental quality: International evidence

Thai-Ha Le a, Youngho Chang b,n, Donghyun Park c
a
RMIT University, Vietnam
b
Nanyang Technological University, Singapore
c
Asian Development Bank, Philippines

H I G H L I G H T S

Relation between trade and the environment is examined for 98 countries.

A long-run relationship exists among pollutant emissions, openness, and growth.

Openness appears to lead to environmental degradation for the global sample.

The relationships differ according to the income of countries.

A feedback effect between trade openness and pollutant emissions exists.

art ic l e i nf o a b s t r a c t

Article history: We examine the relationship between trade openness and the environment in a cross-country panel,
Received 18 August 2015 using the emission of particulate matter (PM10) as the basic indicator of environmental quality. The
Received in revised form panel cointegration test results show a long-run relationship between particulate matter emissions, trade
28 December 2015
openness, and economic growth. We find that increased trade openness leads to environmental de-
Accepted 21 January 2016
Available online 29 January 2016
gradation for the global sample. However, the results differ according to the income of countries. Trade
openness has a benign effect on the environment in high-income countries, but a harmful effect in
Jel classifications: middle- and low-income countries. These results are generally robust to different measures of trade
Q56 openness and environmental quality. Interestingly and significantly, the results are consistent with the
Keywords: popular notion that rich countries dump their pollution on poor countries. Finally, we find evidence of a
Trade openness feedback effect between trade openness and particulate matter emissions for the global sample as well as
Environment different income groups of countries.
Particulate matter emissions & 2016 Elsevier Ltd. All rights reserved.
Global panel data set

1. Introduction
Reflecting widespread concerns over environmental degrada-
tion, protecting the environment has emerged as a global priority
in recent decades. In this context, the impact of trade on the en-
vironment is an issue of growing importance in trade policy. There
has been an increasing number of empirical studies that in-
vestigate the relationship between openness to trade and en-
vironmental quality (see, e.g., Frankel and Romer, 1999; Antweiler
et al., 2001; Cole and Elliot, 2003; Boulatoff and Jenkins, 2010;
Shabaz et al., 2013). The evidence from these studies is mixed,
with some studies finding a positive relationship while others find
a negative relationship. Both theory and evidence suggest that
trade promotes growth. To name just one example, the remarkable
n
Corresponding author.
E-mail address: isyhchang@ntu.edu.sg (Y. Chang).
rise of China was driven to a large extent by its integration into the
global trading system. If trade leads to growth, and growth leads to
environmental deterioration, the affected countries may impose
more stringent environmental regulations. We can expect the
consequent employment of more environmentally friendly pro-
duction methods to improve environmental quality. This view is
empirically supported by Antweiler et al. (2001) who found that
trade openness is associated with reduced pollution as measured
by sulphur dioxide concentrations. Baek et al. (2009) also showed
that trade and income positively affected environmental quality in
developed countries and China. Boulatoff and Jenkins (2010) found
evidence of a negative long-term relationship between trade and
oil-related carbon emissions across different income groups of
countries.
On the other hand, a number of studies have found that in-
creased openness can worsen environmental quality. Conceptually,
a country which has a comparative advantage in products that

http://dx.doi.org/10.1016/j.enpol.2016.01.030
0301-4215/& 2016 Elsevier Ltd. All rights reserved.
46 T.-H. Le et al. / Energy Policy 92 (2016) 45–55
require a lot of pollution may specialise in the production of that
commodity. But doing so will increase pollutant emissions and
adversely affect environmental quality. China’s emergence as a
global manufacturing powerhouse is a good example of rapid ex-
port growth coinciding with extensive environmental deteriora-
tion. This negative view of the impact of trade on the environment
is consistent with Kellenberg (2009) and Managi and Kumar
(2009).
So does trade openness harm or benefit the environment?
More specifically, does trade openness increase or reduce pollu-
tant emissions? In this study, we characterise environmental
quality as a stock and its rate of deterioration or improvement as a
flow. It therefore follows that higher flows of pollutant emissions
cause a greater degradation of the environment. We present new
evidence from a panel dataset of countries across different regions
of the world. Using the globally representative panel dataset, we
hope to contribute toward a broader and deeper understanding of
the impact of trade on the environment, in particular the linkage
between trade and pollutant emissions.
The main findings of the study are as follows. First, we could
not reject the existence of long-run relationship between trade
openness, particulate matter emissions, and income for the whole
panel as well as across different income groups of countries. The
finding is qualitatively robust to different measures of trade
openness and pollutant emissions. Second, we find that in the long
run, increased openness to trade leads to environmental de-
gradation for the global sample. However, the results differ ac-
cording to country income level. For high-income countries, the
environmental effect of trade openness is found to be positive
while for middle- and low-income countries, this impact is sig-
nificantly negative. The results are generally robust to different
proxies of trade openness and pollutant emissions. Third, we find
evidence of a feedback effect-i.e. bidirectional causal relations-
between trade openness and particulate matter emissions for the
global sample as well as across different income groups of
countries.
The rest of the paper is organised as follows. The second section
reviews the relevant literature. The third section discusses the
empirical framework and data. The fourth section reports and
discusses the empirical results. The final section concludes the
paper.
2. Trade and the environment: Some conceptual issues
According to Copeland and Taylor (2013), trade openness can
influence the environment through two key channels: the scale
effect and the composition effect. The scale effect refers to the
impact of trade on the level of economic activity. Specifically, in-
creased openness leads to a greater economic activity, for instance,
more transportation services, and more generally, more produc-
tion and consumption of goods and services. Since these activities
inherently entail environmental costs, one might conclude that
increased economic activity stimulated by trade openness worsens
environmental quality.
On the other hand, the composition effect refers to the influ-
ence of trade on the composition of output across countries.
Specifically, poor countries with relatively weak environmental
regulations will specialise in producing dirty goods while rich
countries with tough environmental policies specialise in clean
goods. This leads to a shifting of polluting industry from developed
to developing countries (Copeland and Taylor, 2013). This view is
consistent with Baek et al. (2009) who find that trade and income
favourably impact environmental quality in developed countries.
However, the study found that the environmental impact of trade
was negative in most developing countries. Dirty industry
migration raises a serious concern that poor and less developed
countries are increasingly bearing the pollution burdens of con-
sumption in rich and developed countries (Copeland and Taylor,
2013).
Yet there are also conceptual grounds for a beneficial effect of
trade on the environment. Antweiler et al. (2001) argue that in-
creased openness may promote the environment through the
technique effect. Specifically, if higher real income induced by
trade liberalisation leads to a higher level of economic develop-
ment, which is usually associated with greater ability and will-
ingness to implement and enforce environmental regulations,
environmental quality might improve. In addition, if the greater
scale of economic activity due to increased openness encourages
exploration into cleaner production techniques, this will reduce
pollutant emissions. In other words, openness to trade can benefit
the environment if it brings about income gains which enable
some countries to specialise in relatively clean industries (Cope-
land and Taylor, 2013).
Since theory offers grounds for both positive and negative re-
lationship between trade and the environment, the issue must be
settled through empirical analysis. In this context, we empirically
analyse a large cross-country dataset of particulate matter emissions
in 98 countries. Our empirical analysis of the relationship between
trade openness and environmental pollution takes into account the
income effect – i.e. the Environmental Kuznets Curve (EKC) hypoth-
esis. This hypothesis posits an inverted U-shaped pattern between
environmental pollution per capita and income per capita. As income
increases, environmental pollution increases up to some income
threshold, after which environmental pollution declines.1 The evi-
dence on the EKC hypothesis is mixed and inconclusive. The results
from some studies are consistent with the hypothesis (e.g., Dinda and
Coondoo, 2006; Managi and Jena, 2008).
On the other hand, many other studies (e.g., Dinda et al., 2000;
Coondoo and Dinda, 2008; Akbostanci et al., 2009) refute the EKC
hypothesis. Coondoo and Dinda (2002) discuss the issue of caus-
ality in the context of EKC from the standpoint of economic theory,
and explain how this links up with the concept of income–emis-
sion causality underlying the Granger causality test. Their study
used a dataset which covers 88 countries to examine income–
emission causality patterns separately for 12 country groups
across different continents. The results reveal three different types
of causality relationship for different country groups. These studies
that test the EKC hypothesis are, however, based on a bivariate
framework which might suffer from omitted variable bias that
causes spurious results.
To summarise, the literature on the relationships between
trade openness and environmental quality is inconclusive. Further,
very few studies have used a panel framework to address possible
cross-country dependence. We were only able to find Jaunky
(2011), Arouri et al. (2012), Haggar (2012) and Ozcan (2013). Yet,
none of these studies looks at a sample of countries from the
whole world nor do they incorporate income level and the EKC
hypothesis into the analysis. Our aim is to contribute to the lit-
erature by filling these gaps.
3. Empirical framework and data
In this section, we described the framework and data that we
use for the empirical analysis of the relationship between trade
and the environment.
1
Dinda (2004) provides a thorough review of the EKC literature, including
background history, conceptual insights, policy implications, and the conceptual
and methodological critique.
 T.-H. Le et al. / Energy Policy 92 (2016) 45–55
3.1. The baseline model and data description
To illustrate theoretical relationships among trade openness,
per capita income and environmental quality, we first define en-
vironmental quality (EQ) as a function of trade openness (TO) and
per capita income and the square of per capita income (GDP and
GDP2) as follows:
(
EQ = f TO, GDP , GDP 2) (1a)
As illustrated in Eq. 1a, since income plays a strong role in
determining environmental outcome, we incorporate the EKC into
our analysis. Since environmental quality is a key variable in the
analysis of this study, it is important to choose an appropriate
indicator for it. The environmental impact of trade might take
various forms of pollution. In other word, trade might entail sev-
eral types of environmental effects (Frankel and Rose, 2005).
For example, in modelling the effect of trade on a country’s
environment for a given level of per capita GDP, Frankel and Rose
(2005) look at seven measures of environmental quality, namely,
SO2 (sulphur dioxide), NO2 (nitrogen dioxide), PM (total sus-
pended particulate matter), CO2 (industrial carbon dioxide emis-
sions), deforestation (average annual percentage change), energy
depletion (the product of unit resources rents and the physical
quantities of fossil fuel energy extracted which consists of coal,
crude oil and natural gas, as a percentage of GDP), and rural clean
water access as percentage of rural population. Nevertheless, their
study focuses on the first three measures of local air pollution,
since they are the most relevant. In particular, they argue that it is
impossible to address CO2 by regulation at the national level since
it is a purely global externality. Deforestation and energy depletion
are not measures of pollution. Furthermore, while it might be
worthwhile to look at these broader measures of environmental
quality, Frankel and Rose (2005) assert that the measurements of
deforestation, energy depletion and water access might involve
serious problems of composition and data reliability.
Since our study covers a global panel data set, availability of
data that is commensurable for a large number of countries and
over long time periods is a major problem. Data are not available
for many environmental quality indicators, such as NOx (nitrogen
oxides), VOC (volatile organic compound), CO (carbon monoxide),
PM2.5 (particulate matter up to 2.5 μm in size), ozone, measures
of water quality such as BOD (biochemical oxygen demand) and
COD (chemical oxygen demand), indicators of soil degradation,
deforestation, biodiversity loss, and the like. Also, we did not use
composite environmental quality indices, such as the Environ-
mental Sustainability Index or the various indices for anthro-
pogenic ecological footprints (www.ciesin.org), because they are
available only for very few (most recent) years and usually com-
bine ecological and environmental policy components (Bernauer
and Koubi, 2009). On the other hand, data for PM10 is reliable and
available for a large number of countries (98 countries) during the
investigation period. As such, we use PM10, an indicator of local air
pollution, as the main indicator of environmental quality in this
study.
Air pollution is indeed a major environmental concern in most
major cities across the world (Nowak et al., 2006). Specifically,
particulate matter (PM) air pollution is one of the major causes of
poor environmental quality in many cities all over the world, with
serious effects on human health, buildings, and vegetation (Sal-
vador et al., 2012). PM is solids or liquids that are dispersed in
ambient air (Miah et al., 2011). PM10 are particulates with a dia-
meter less than 10 μm, small enough to be inhaled. They may thus
enter deep into the human respiratory tract and pulmonary sys-
tem (Shandilya et al., 2007). These particles are responsible for
most of the airborne particle threat to human health due to their
47
small size. They pose a human health hazard, potentially causing
heart disease, lung cancer, asthma, atherosclerosis, cancer (as soot
particles can contain carcinogenic material), and even death
(Brunekreef and Holgate, 2002). These particulates also contribute
to global warming, since increase in suspended PM directly in-
creases greenhouse gas emissions (Miah et al., 2011). Several
studies in the literature use PM10 as an indicator of environmental
quality (e.g., Nowak et al., 2006; Plassmann and Khanna, 2006; Lee
et al., 2009; Miah et al., 2011; Salvador et al., 2012).
To conclude, there are several indicators of environmental
quality in literature, namely, SO2, NOx, BOD, COD, and particulate
matter (PM10 and PM2.5). In this study, due to the data availability
of our global panel data set, we use particulate matter 10 μm or
less in diameter (PM10) as the main measure of environmental
quality, which is taken from Word Development Indicators (WDI).2
Nonetheless, we will attempt to judge the robustness of our results
by examining carbon dioxide emissions (CO2, measured in metric
tons per capita) (CE hereafter) as another indicator of environ-
mental quality since data is available for our global sample. The
Environmental Protection Agency (EPA) recently determined that
CO2 emissions pose a threat to human health and welfare (Bou-
latoff and Jenkins, 2010). PM10 has local and trans-boundary im-
pacts whereas CO2 is a greenhouse gas and has a global impact.
Trade openness variable has been measured in various ways in
the literature. By employing different measures of trade openness,
we are able to examine the relationship between trade openness
and environmental quality more thoroughly. Squalli and Wilson
(2011) review several common measures of trade openness that
have been used in literature, and list M/GDP, X/GDP and (X þM)/
GDP (which, respectively, express import, export and total trade as
a share of GDP of a given country) as the three most widely used
measures of trade openness. A large number of studies have also
employed these three indicators of trade openness in their em-
pirical investigation, for instance, Deme (2002), Kim and Lin
(2009), Squalli et al. (2010), Herrerias and Orts (2011), Kim (2011),
Harris et al. (2011), Hye (2012), and Liargovas and Skandalis
(2012). Hence, to check for the robustness of the results, besides
using the ratio of total trade to GDP as the main measure of trade
openness, we also experiment with alternative measures, namely,
the ratio of exports to GDP and the ratio of imports to GDP.
As such, the baseline model in this study could be written in
this following compact form:
PMit = f (TOit , GDPit , GDPit2) (1b)
or, alternatively:
PMit = νi + η1iTOit + η2iGDPit + η3iGDPit2 + εit (1c)
where i¼ 1, 2, 3, … N for each country in the panel and t¼ 1, 2, 3,
… T refers to the time period. PMit is the particulate matter 10 μm
or less in diameter (PM10, as measured in micrograms per cubic
metre), TOit is the trade openness (measured as the ratio of the
value of total trade to GDP), GDPit is per capita real GDP (constant
2005 US$), and GDPit2 is the square of per capita real GDP.
The data of all required variables are taken from World De-
velopment Indicators (WDI, 2014). The data used in this study is
pooled annual time series. All variables are converted into natural
logarithms to reduce heteroskedasticity. The variables are entered
into the model [1c] in their log level or first log difference,
2
According to WDI (2014), PM10 are “capable of penetrating deep into the
respiratory tract and causing significant health damage. Data for countries and
aggregates for regions and income groups are urban-population weighted PM10
levels in residential areas of cities with more than 100,000 residents. The estimates
represent the average annual exposure level of the average urban resident to
outdoor particulate matter. The state of a country’s technology and pollution
controls is an important determinant of particulate matter concentrations”.
48 T.-H. Le et al. / Energy Policy 92 (2016) 45–55
depending on whether they are I(0) or I(1) series. In the latter case,
we can obtain the growth rate of the relevant variables by their
differenced logarithms. The coefficients η1, η2, η3 correspond to the
elasticities of particulate matter dioxide emissions with respect to
openness to trade, real GDP per capita, squared real GDP per ca-
pita, respectively. Under the EKC hypothesis, which implies non-
linear effect of income on the environment, the elasticity estimates
of particulate matter emissions per capita with respect to real GDP
per capita and the square of real GDP per capita are expected to be
positive and negative, respectively. The sign of η1, the elasticity
estimate of particulate matter emissions per capita with respect to
trade, is the main variable of interest, in light of the mixed and
inconclusive effect of trade on the environment found in the
literature.
Our country sample includes 98 countries and our sample
period spans 1990 to 2013. The choice of countries in the sample
and the sample period is based on data availability. The sample
countries included are at various stages of economic development.
Previous studies seem to indicate that the relationship between
economic growth and the environment might be different for
countries at different income levels (e.g., Al-Mulali, 2011). In ad-
dition, Tayebi and Younespour (2012) showed that it is useful to
examine the trade-environment relationship conditional on
country characteristics. This is because besides differences in fac-
tor endowments, trade flows are also determined by differences in
environmental and pollution policy. Tayebi and Younespour (2012)
argue that countries with higher per capita income tend to have
more stringent environmental regulations since environmental
quality is a normal good. This gives rise to the pollution haven
hypothesis, which implies that dirtier industries have been shift-
ing from the developed to the developing world to escape tighter
environmental standards (Esty, 2001).3
In light of this possibility, in addition to analysing the whole
world panel, we divide the 98 countries into three sub-samples
according to World Bank’s income classification. Specifically, the
first sub-sample includes high-income countries, which have in-
comes of US$12,616 or more, the second sub-sample is middle-
income countries (lower-middle income countries have incomes
between US$1,036 and US$4,085, and upper-middle income
countries have incomes between US$4,086 and US$12,615) and
the third sub-sample consists of low-income countries, which
have a per-capita income of US$1,035 or less.
Table 1 presents the averages and the average growth rates of
the key variables used in the study. The levels of most variables are
higher for high-income countries than those of the low- and
middle-income countries, except for particulate matter emissions.
However, the pattern is different for growth rates. All the income
groups have negative numbers for particulate matter emissions.
High-income countries have the biggest negative growth rate
while low-income countries have the lowest negative one. Middle-
income countries have the highest growth for carbon dioxide
emission and GDP per capita while low-income countries have the
highest growth for different measures of trade openness.
3.2. Methodology
To investigate the relationships between particulate matter
emissions (PM) and trade openness (TO), real GDP per capita
(GDP), and square of GDP per capita (GDP2) for 98 countries in the
world for the period 1980 to 2013, we use a panel data model.
Panel data has many advantages over cross-sectional or time series
3 tegration tests developed by Westerlund (2007) and Persyn and
Here if trade flows could be specified by income group, it would be optimal.
However, this is not empirically feasible due to the lack of comprehensive data for a
global panel during a sufficiently long period.
data. For instance, in the case of short time series, using panel data
allows for more observations by pooling the time series data
across countries and results in higher power for the Granger
causality test (Pao and Tsaim, 2010). In addition, in contrast to time
series and cross-sectional data, by controlling for individual het-
erogeneity, panel data allows for “more informative data, more
variability, less collinearity among the variables, more degrees of
freedom, and more efficiency” (Baltagi, 2005).
The first step of the analysis is to test cross-sectional depen-
dence to decide appropriate unit root tests. Cross sectional in-
dependence states that error terms are not cross-correlated, and
zero error covariance is a very important issue in panel unit root
and cointegration tests. Relaxing this assumption makes the de-
rived distributions of panel unit root and cointegration tests no
longer valid. Instead, they are dependent in a very complicated
way upon various nuisance parameters, which result in correla-
tions across individual units (Chang, 2002). As noted in Cerrato
(2001), cross sectional dependence can be caused by different
factors such as model misspecification or common shocks. Failure
to take into consideration cross-sectional dependence between
the series may cause significantly biased results (Breusch and Pa-
gan, 1980; Pesaran, 2004).
In terms of econometrics, cross-sectional dependency could be
explained as individuals forming panels are related to error terms
in the panel data model, as indicated in Eq. 2. That is, if individuals
forming a panel are affected by a shock, other individuals of the
panel are affected as well.
yit = αi + βi xit + εit (2)
cov(εit , εij ) ≠ 0.
A number of Lagrange multiplier (LM) tests are available to
check cross-sectional dependency (CD), namely, CDLM1, CDLM1adj,
CDLM2 and CDLM. All CDLM tests come with the null hypothesis of
no cross sectional dependency across units. The first two LM tests,
i.e. CDLM1 and CDLM1adj tests, are developed by Breusch and Pagan
(1980) and Pesaran and Yamagata (2008), respectively. These tests
are useful when N is fixed and T goes to infinity (T4 N). The other
two LM tests, which are CDLM2 and CDLM tests, are proposed by
Pesaran (2004). However, the CDLM2 test is useful when T and N
are larger enough (Guloglu and Ivrendi, 2008). Meanwhile, the
CDLM test is better to use when N is larger and T is smaller (T oN),
which is the case of this study. As such, this study employs the
Lagrange multiplier CDLM test to check cross sectional dependency.
In the second step, panel unit root tests are conducted. There
are two groups of panel unit root tests developed in literature. The
first group consists of first generation unit root tests that ignore
cross-sectional dependence. The second group includes second
generation unit root tests that allow for cross-sectional depen-
dence (e.g., Phillips and Sul, 2003; Bai and Ng, 2004; Moon and
Perron, 2004; Smith et al., 2004; Pesaran, 2007).
This study employs the IPS unit root test by Im et al. (2003). The
test removes cross-sectional averages from the data to control for
the cross-sectional correlation (as suggested by Levin et al., 2002).
IPS test is used as it is suitable for panel with N → σ and T is fixed.
The third step involves investigating the long-run relationships
between TO, CE, GDP and GDP2. We perform panel cointegration
tests on the three following sub-samples. The first sub-sample
includes all the 98 countries in the global sample. The second sub-
sample consists of only high-income countries, the third panel
includes only middle-income countries, and the fourth panel
comprises low-income countries. This study uses the panel coin-
Westerlund (2008). Two different classes of tests can be used to
evaluate the null hypothesis of no cointegration and the
 T.-H. Le et al. / Energy Policy 92 (2016) 45–55 49

Table 1
Summary of the Variables, 1990–2013.

CO2 (metric tons per PM10 (micrograms per cubic GDP per capita (constant 2005 TO (TRADE/ EXPORT/GDP IMPORT/GDP
capita) meter) US$) GDP)

In levels
All countries 4.352 52.498 12080 84.623 41.590 44.362
East asia & Pacific 7.021 46.251 15764 125.100 64.987 57.545
Europe & Central asia 8.034 37.246 29001 88.556 42.180 40.930
Latin america & Caribbean 2.106 53.379 4484 69.134 39.057 45.886
Middle east & North africa 3.374 70.395 4579 92.035 44.526 54.659
North America 17.878 23.588 36529 45.954 21.961 21.781
South Asia 0.654 125.230 724 43.624 18.099 23.648
Sub-Saharan africa 0.983 56.630 1643 78.754 35.197 42.371
Low-income countries 0.206 58.160 363 53.369 21.006 34.323
Middle-income countries 2.174 63.458 2979 79.001 40.368 44.767
High-income countries 9.115 34.527 29590 105.495 51.879 48.106
In growth rates
All countries 0.59%  5.62% 2.20% 2.00% 3.00% 3.50%
East Asia & Pacific  2.74%  6.04% 3.40% 1.60% 3.10% 3.00%
Europe & Central asia  4.88%  6.67% 1.70% 2.40% 3.50% 3.50%
Latin America &  2.44%  5.19% 2.10% 1.20% 3.50% 4.70%
caribbean
Middle East & North  3.12%  5.32% 2.40% 0.90% 1.80% 0.30%
Africa
North America  5.16%  7.65% 1.40% 1.60% 2.10% 2.70%
South Asia  0.80%  4.38% 3.80% 2.30% 3.10% 2.30%
Sub-Saharan Africa 11.08%  4.81% 1.90% 2.80% 2.50% 3.90%
Low-income countries  2.88%  4.31% 1.50% 3.80% 4.10% 4.20%
Middle-income countries 4.46%  5.25% 2.30% 1.80% 3.10% 4.00%
High-income countries  3.23%  6.70% 2.00% 1.50% 2.50% 2.70%

alternative hypothesis: group-mean tests and panel tests. Wes- and solves the following minimisation problem, function of β :
terlund (2007) develops four panel cointegration test statistics (Ga,
Gt, Pa and Pt) based on the Error Correction Model (ECM). These M M
S(β ) = (∑ Zi′εi(β ))′W (∑ Zi′εi(β )) = g (β )′Wg (β ) (5)
four test statistics are normally distributed. The two tests (Gt, Pt) i=1 i=1

are computed with the standard errors of the parameters of the

Error Correction (EC) estimated in a standard way, while the other
statistics (Ga, Pa) are based on Newey and West (1994) standard
errors, adjusted for heteroskedasticity and autocorrelations.
By applying an Error-Correction Model in which all variables
are assumed to be I(1), the tests proposed by Westerlund (2007)
test the absence of cointegration, by determining whether error-
correction is present for individual panel members and for the
panel as a whole. Depending on the presence of cointergration, we
estimate the long-run parameters in the cointegrating vector. In
cross-sectional analysis, the error variance is likely to vary across
the groups, affecting the consistency of the estimators. Using the
generalised least squares method (GLS) in the estimation could
address this issue. However, other sources of variance variability
might still exist, for example the correlation of the squared re-
siduals with the regressors in each group. There are two sources of
within-group heteroskedasticity, which could be given either by
differences in the unconditional variance of the residual terms or
by differences in the variance of the residual terms conditioned on
the regressors. For this purpose, we use an efficient estimator
which uses the generalized method of moments (GMM) to control
for both heteroskedaticity sources.
Considering the model:
Yit = α + Xit′ β + δi + γt + εit
where Zi′ is the instrument matrix for the i-th cross-sec-
tion, εi(β ) = (Yit − α − Xit′ β )and W is a weighting matrix.
In addition, desirable properties of the GMM and system GMM
estimators hold asymptotic for large N, particularly more suitable
when N 4T, as in this study. Meanwhile, GLS is more suitable for
samples with a small number of cross-sectional units. This gives
rise to an important reason for choosing the GMM method as the
main method in this study. The final step is conducting panel
short-run and long-run causality tests. To determine the direction
of Granger causality among the variables in both the long-run and
the shot-run, a panel-based error correction model is employed,
following the two steps of Engle and Granger (1987). The study
first estimates the long-run parameters in Eq. 1c via the FMOLS
estimator to obtain the residual. It then defines the first-lagged
residual as the error correction term and estimates the following
dynamic error correction models:
m m m
ΔPMit = γ1i + ∑ γ11ikΔPMit − k + ∑ γ12ikΔTOit − k + ∑ γ13ikΔGDPit − k
k=1 k=1 k=1
m
+ ∑ γ14ikΔGDPit2− k + ϕ1iECTit − 1 + ε1it
k=1 (6)
(3)

where i = 1, N , t = 1, T , Y is a dependent variable, α is a constant, m m m

X is a vector of explanatory variables, β represents a vector of ΔTOit = γ2i + ∑ γ21ikΔPMit − k + ∑ γ22ikΔTOit − k + ∑ γ23ikΔGDPit − k
coefficients to be estimated, εit represents the residual terms, δi k=1 k=1 k=1
and γt are the cross-section and, respectively period fixed or ran- m

dom effects. + ∑ γ24ikΔGDPit2− k + ϕ2iECTit − 1 + ε2it

The GMM estimator is computed based on the following: k=1 (7)

M M
g (β ) = ∑i = 1 gi(β ) = ∑i = 1 Zi′εi(β ) (4)
50 T.-H. Le et al. / Energy Policy 92 (2016) 45–55

Table 2 Table 3
Results of Bias-adjusted LM Test of Error Cross-section Independence. Panel Unit Root Test Results.

PM10 CO2 Intercept case

Trade Test Level 1st difference

Test Statistic Statistic Statistic Statistic IPS Statistic IPS Statistic
Fixed effect Random effect Fixed effect Random effect
CDLM 10.878*** 15.997*** 8.945*** 12.719*** TO  1.169  8.329***
Export GDP 4.8483  4.6323***
Test Statistic Statistic Statistic Statistic GDP2 8.286  4.942***
Fixed effect Random effect Fixed effect Random effect IM/GDP  0.449  7.267***
CDLM 22.516*** 32.230*** 8.945*** 12.719*** EX/GDP 0.723  6.276***
Import CE 2.985  3.933***
Test Statistic Statistic Statistic Statistic PM 1.444  6.745***
Fixed effect Random effect Fixed effect Random effect
CDLM 19.486*** 27.235*** 8.776*** 11.412*** Note: Ho: All panels contain unit roots.
***
indicates rejection of the null hypothesis at the 1% significance level. Cross-
H0: cross-sectional independence. sectional correlation is controlled by removing cross-sectional means (Levin et al.,
***
indicates rejection of the null hypothesis at the 1% significance level. 2002). The number of lags for each panel is chosen by minimising the AIC, subject
to a maximum of 4 lags.
m m
ΔGDPit = γ3i + ∑ γ31ikΔPMit − k + ∑ γ32ikΔTOit − k deviations from long-run equilibrium.
k=1 k=1 Our empirical strategy follows several previous studies which
m m
employed the EKC hypothesis in their examination (for example,
+ ∑ γ33ikΔGDPit − k + ∑ γ34ikΔGDPit2− k + ϕ3iECTit − 1 + ε3it Lean and Smyth, 2010; Wang et al., 2011; Hamit-Haggar, 2012;
k=1 k=1 (8)
Ozcan, 2013). With respect to the estimation method, Eqs. (6) and
(7) are estimated using Arellano–Bond (1991)’s linear dynamic
m m panel-data estimation, and Eqs. (8) and (9) are estimated using
ΔGDPit2 = γ4i + ∑ γ41ikΔPMit − k + ∑ γ42ikΔTOit − k Zellner (1962; 1963) and Zellner and Huang (1962)’s seemingly
k=1 k=1 unrelated regression as this allows joint tests. Subsequently, the
m m
Wald test is used to determine the short-run and long-run
+ ∑ γ43ikΔGDPit − k + ∑ γ44ikΔGDPit2− k + ϕ4iECTit − 1 + ε4it causality.
k=1 k=1 (9)

where the term Δdenotes the first difference, m is the lag length
set at three, which is based on Akaike information criterion. ECT is
the error-correction term, ϕj, i (j¼1, 2, 3, 4) is the adjustment
coefficient, and εjit is the disturbance term presumed to be un-
correlated with zero means.
The error correct term in Eqs. (6–9) can be derived from the
long-run equilibrium Eq. (1c) as follows:
^
ECTit = PMit − ν^i − η^1iTOit − η^2iGDPit − η^3iGDPit2 (10)
Two sources of causation can be derived from the estimation of
the dynamic error correction models as in Eqs. (6–9), including the
short-run causality and long-run causality. In terms of short-run
Granger causality represented in Eq. 6, causality runs from ∆TO to
∆PM if the null hypothesis: γ12ip=0, ∀ ip is rejected, while causality
runs from ∆GDP and ∆GDP 2 to ∆PM if the joint null hypothesis:
γ13ip = γ14ip=0, ∀ ip is rejected via a Wald test. In Eq. 7, causality
runs ∆PM to ∆TO if the null hypothesis: γ21ip=0, ∀ ip is rejected,
whereas causality runs from ∆GDP and ∆GDP 2 to ∆TO if the joint
null hypothesis: γ23ip = γ24ip=0, ∀ ip is rejected. In Eqs. 8 and 9, due
to the presence of two variables related to GDP growth (∆GDP and
∆GDP 2) in the system, we need to make cross-equation restrictions
to determine the causality from either ∆PM or ∆TO to GDP growth
via a likelihood ration (LR) test. Causality from ∆PM to ∆GDP and
∆GDP 2 is supported if the null hypothesis: γ31ip=0, ∀ ip and
γ41ip=0, ∀ ip is rejected. Similarly, causality from ∆TO to ∆GDP and
∆GDP 2 is supported if the null hypothesis: γ32ip=0, ∀ ip and
γ42ip=0, ∀ ip is rejected.
With regard to long-run causality in Eq. 6, if the null hypoth-
esis: ϕ1i=0, ∀ i is rejected, then ∆PM responds to deviations from
long-run equilibrium. In Eq. 7, if the null hypothesis: ϕ2i=0, ∀ i is
rejected, then ∆TO responds to deviations from long-run equili-
brium. Finally, in Eqs. 8 and 9, if the null hypothesis:
ϕ3i = ϕ4i=0, ∀ i is rejected, then ∆GDP and ∆GDP 2 jointly respond to
4. Empirical results and discussions
In this section, we report and discuss the results of our em-
pirical analysis. In the first stage of the analysis, we test for cross-
sectional dependence. Table 2 reports the results of conducting the
Lagrange multiplier CDLM test.
The CD test statistic strongly rejects the null hypothesis of no
cross-sectional dependence. This implies the presence of cross-
sectional dependence under a fixed effect (FE) specification. Fol-
lowing Baltagi (2005), we also report the results of the model
using the random effect (RE) estimator.4 The finding is the same as
the case of FE estimator and qualitatively robust to different
measures of trade openness and pollutant emissions. Thus, we
proceed by conducting panel unit root tests that take cross-sec-
tional dependence into account.
The results of conducting IPS (2003)’s panel unit root test are
reported in Table 3. The unit root statistics reported are for the
logged variables in level and in first difference. For the variables in
level, the results reveal that we can accept the null hypothesis of a
unit root for all the variables at conventional significance levels.
Meanwhile, when taking the first difference, the test rejects the
null hypothesis at the 1% level for all the variables.
The third step of the empirical study involves investigating the
long-run relationship between TO, PM, GDP and GDP2, using the
panel cointegration tests developed by Westerlund (2007) and
Persyn and Westerlund (2008). As these results in Table 2 strongly
indicate the presence of common factors affecting the cross-
4
We conducted the Hausman test (with random effects is preferred under the
null hypothesis due to higher efficiency, while under the alternative, fixed effects is
at least consistent and thus preferred) for all models in our study. The results
suggested fixed effects are preferred for all the models, regardless of the different
measures of trade openness and environmental quality. Nevertheless, we also
conducted and present the results for random effects in Table 2 for robustness
checks. The Hausman test results are available upon request.
 T.-H. Le et al. / Energy Policy 92 (2016) 45–55 51

Table 4
Westerlund (2007) Panel Cointegration Test Results.

Trade/GDP as TO measure

Statistic All countries High income Middle income Low income

Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend
PM10 Gt  4.133***  0.598*  0.34 1.643**  4.607***  2.606**  1.298**  2.56**
Ga 9.415 15.259* 4.065 6.594 6.2*
10.45 5.834  3.331
Pt  26.096***  13.689*** 20.293*** 23.954***  31.735***  20.291*** 2.232  15.74***
Pa 0.715*** 10.128** 1.977*** 7.045*  1.846*** 5.873** 4.87**  11.157**
CO2 Gt  0.709**  0.462*  0.34 1.549** 1.832 2.385**  2.974***  3.298***
Ga 9.855 14.754* 4.065 6.378 7.142 10.609* 5.426  4.392
Pt  1.829**  0.242* 10.293** 11.751**  11.517*** 11.705***  11.025***  20.127***
Pa 4.534* 11.052** 1.977*** 5.146* 2.779* 8.139* 12.854***  16.007***
Export/GDP as TO measure
Statistic All countries High income Middle income Low income
Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend
PM10 Gt  3.065***  0.345* 0.112 1.719**  3.927***  1.528*  0.603*  2.691**
Ga 9.802 15.033* 4.392 6.679 6.782 10.452* 5.587  3.92
Pt  14.049***  12.77*** 10.557*** 11.554***  17.072***  14.193*** 12.131**  10.603**
Pa 2.912** 8.615** 2.412** 5.332** 0.326*** 4.354*** 4.547**  2.172
CO2 Gt  1.164**  0.084*  0.702  0.55 1.495 3.204  3.277***  3.584**
Ga 9.457** 14.78** 4.179* 6.387* 7.086** 10.776** 4.787** 7.927
Pt  1.311** 0.895* 2.12 *
1.473*  0.764 3.394*  3.384**  7.368***
Pa 4.001** 10.975** 2.567* 15.101** 2.966* 8.198** 1.142** 4.58***
Import/GDP as TO measure
Statistic All countries High income Middle income Low income
Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend Intercept Intercept and trend
PM10 Gt  3.824***  0.78* 1.252* 3.568**  5.847***  4.249***  0.371* 1.335*
Ga 9.655* 15.341* 4.575 6.763 6.183* 10.469* 5.921 8.984*
Pt  16.679***  8.221**  10.16** 12.404**  20.992***  12.117*** 2.656* 7.235**
Pa 2.913*** 10.803* 2.356** 15.134**  0.668*** 6.146** 5.101** 8.537**
CO2 Gt 0.134* 0.283 1.473* 1.652** 0.654* 2.455  0.371*  3.536***
Ga 9.728* 14.88* 4.537 6.296 6.818 11.042* 5.921 7.84
Pt  1.594** 0.513* 1.869* 3.523*  2.067** 3.169* 2.656*  9.843***
Pa 4.39** 11.311*** 2.783* 4.958** 2.907* 8.675** 5.101** 4.027***

Note: H0: no cointegration.

*
indicate rejection of the null hypothesis at the 10% significance level. Using the bootstrap approach of Westerlund (2007) to account for cross-sectional dependence, the
number of replications is 400.
**
indicate rejection of the null hypothesis at the 5% significance level. Using the bootstrap approach of Westerlund (2007) to account for cross-sectional dependence, the
number of replications is 400.
***
indicate rejection of the null hypothesis at the 1% significance level. Using the bootstrap approach of Westerlund (2007) to account for cross-sectional dependence, the
number of replications is 400.

sectional units, the study bootstraps robust critical values for the
test statistics. Table 4 reports the within and between dimension
results of the panel cointegration tests. The results indicate that
we can reject the null hypothesis of no cointegration at conven-
tional significance levels. We thus conclude that the variables TO,
PM, GDP and GDP2 move together in the long run. This result holds
across different income groups of countries. The results are robust
to different measures of trade openness and environmental
quality.
The finding of a long-term relationship among the variables
could be explained due to the important channels through which
trade can affect the environment, including scale, technique, and
composition effects proposed by Copeland and Taylor (2004) and
Antweiler et al. (2001), reviewed thoroughly in Section 2. The
overall environmental effect of trade on economic growth depends
on the net result of all three effects. Our finding is consistent with
previous studies in literature which also found evidence of a long-
term relationship between trade, income and the environment
(e.g., Halicioglu, 2009; Boulatoff and Jenkins, 2010; Shahbaz et al.,
2013; Mehrara et al., 2014). However, most of these studies are
individual country studies while our paper covers a global sample
of 98 countries.
The implication of the cointegration test results is that there is
a long-run relationship between PM, TO, GDP and GDP2 for a cross
section of the countries. This result is robust to different measures
of trade openness as well as environmental quality. Given the
presence of cointergration, this study estimates the long-run
parameters in the cointegrating vector using GMM panel estima-
tion techniques that allow for estimating heterogeneous coin-
tegrated vectors.5 The results are shown in Table 5. Since all the
variables are expressed in natural logarithms, the coefficients can
be interpreted as long-run elasticity estimates. The results show
that, increased openness to trade causes environmental degrada-
tion for the global sample. For the panel of high-income countries,
however, increased openness to trade benefits the environment.
One possible interpretation is that increased foreign trade re-
sults in income gains which enable some countries to specialise in
relatively clean industries (Copeland and Taylor, 2013). Trade is
beneficial primarily because of its effect on wealth. Trade increases
wealth and therefore environmental quality through a technique
effect that improves production efficiency. Furthermore, greater
wealth increases investment in environmental protection (Bhag-
wati, 2000). This result is consistent with the finding in Baek et al.
(2009) that trade has a positive effect on environmental quality in
developed countries. However, Baek et al. (2009) use a time series
dataset, while in this study we use a global panel dataset which
includes twice as many countries.
5
Before the GMM estimator, the Di Iorio and Fachin (2007)’s test for breaks in
cointegrated panels is performed to examine the stability of the relationship be-
tween the variables of interest. The results show that we can accept the null hy-
pothesis of no break. That is, the relationship among the investigated variables is
stable and not subject to structural breaks during the investigation period. To
conserve space, the results are not presented here but they are available upon
request.
52 T.-H. Le et al. / Energy Policy 92 (2016) 45–55

Table 5 Table 5 (continued )

Estimation Results of Models with Different Measures of Trade Openness and En-
vironmental Quality. All GMM

All GMM (1) (2) (3) (4) (5) (6)

PM PM PM CE CE CE
(1) (2) (3) (4) (5) (6)
PM PM PM CE CE CE (3.82) (2.73)
ΔGDP 0.053 0.039 0.044 1.793* 1.827* 1.710*
*** *** ***
ΔCE(  1) 0.621 0.628 0.611 (1.38) (1.21) (1.17) (2.12) (2.33) (2.18)
(23.82) (24.62) (23.00) ΔGDP2  0.042  0.063  0.035  1.218*  1.165*  1.118*
ΔPM(  1) 0.736*** 0.739*** 0.729*** (  1.37) (  1.00) (  1.68) (  2.00) (  2.18) (  2.00)
(15.47) (15.00) (16.25) ΔEX/GDP 0.078*** 0.218**
ΔTO 0.105** 0.607** (4.08) (2.83)
(2.97) (3.55) ΔIM/GDP 0.060*** 0.148*
ΔGDP 0.131* 0.140* 0.148* 0.169 0.167 0.204 (4.37) (2.07)
(2.07) (2.16) (2.26) (1.44) (1.38) (1.71) _cons 6.294*** 6.538*** 6.285*** 15.62 14.11* 13.78
ΔGDP2  0.016  0.171  0.168 0.127 0.114 0.117 (4.86) (5.05) (5.10) (1.94) (2.01) (1.85)
(  1.73) (  1.32) (  1.77) (1.32) (1.18) (1.22) N 679 678 678 664 664 664
ΔEX/GDP 0.006 0.013
(0.48) (0.37) Note:
ΔIM/GDP 0.203** 0.552** *
indicate rejection of the null hypothesis at the 10% significance level. t sta-
(2.60) (2.76) tistics are in parentheses.
*** ***
_cons 4.018 4.158 4.121***  4.104 **
 4.057 **
 4.192** **
indicate rejection of the null hypothesis at the 5% significance level. t sta-
(5.46) (5.69) (5.44) (  2.67) (  2.62) (  2.73) tistics are in parentheses.
N 1937 1925 1925 1860 1854 1854 ***
indicate rejection of the null hypothesis at the 1% significance level. t sta-
High-in- GMM tistics are in parentheses.
come
countries
(1) (2) (3) (4) (5) (6) On the other hand, for middle and low-income countries, we
PM PM PM CE CE CE find that the environmental impact of trade was significantly ne-
ΔCE(-1) 0.740*** 0.740*** 0.744*** gative. The results are similar to Baek et al. (2009), which finds
(17.07) (16.98) (16.87)
that trade has detrimental effects on environmental quality in
ΔPM(-1) 0.800*** 0.789*** 0.790***
(20.41) (19.39) (19.74) most developing countries.
ΔTO  0.201**  0.109* Overall, our results could be explained by the theoretical fra-
(  2.90) (  2.40) mework for the trade-environment nexus proposed by Tayebi and
ΔGDP 0.095 0.0885 0.108 0.238* 0.236 0.273* Younespour (2012). The framework posits that international trade
(1.73) (1.55) (1.83) (1.98) (1.90) (2.21)
ΔGDP2  0.009  0.0775*  0.0966** 0.0258 0.0355 0.00821
has an impact on environmental quality that varies with the
(  1.08) (  2.33) (  2.94) (0.40) (0.49) (0.12) comparative advantage of a country. They argue that capital
ΔEX/GDP  0.602*  0.040* abundance plays a critical role in determining comparative ad-
(  2.31) (  2.40) vantage. Specifically, all else equal, if a country is relatively capital
ΔIM/GDP  0.105  0.108*
abundant (sufficiently rich), it should export the capital intensive
(  2.89)** (  2.58)
_cons 2.345*** 2.132 ***
2.384***  2.553**  2.684*  2.335* (polluting) good. Meanwhile, a poor country is normally relatively
(4.83) (4.08) (4.76) (  2.79) (  2.46) (  2.42) labour abundant, and hence it should export the labour intensive
N 298 293 293 284 282 282 (clean) good. In this context, our results support the argument by
Middle-in- GMM
Copeland and Taylor (2013) that dirty industry migration transfers
come
countries the pollution burdens of developed countries’ consumption to
(1) (2) (3) (4) (5) (6) developing countries. These findings are robust across different
PM PM PM CE CE CE measures of trade openness.
ΔCE(  1) 0.315** 0.313** 0.312**
Further, for the global sample as well as different income
(2.77) (2.77) (2.74)
ΔPM(  1) 0.678*** 0.682*** 0.678*** groups of countries, we could not find evidence of an inverted
(11.41) (11.73) (12.14) U-shaped pattern between particulate matter emissions and in-
ΔTO 0.109** 0.309* come per capita at 5% significance level. The results are robust to
(2.92) (2.16) different measures of trade openness as well as environmental
ΔGDP 0.104 0.140 0.140 0.728 0.696 0.752
(1.45) (1.86) (1.81) (1.84) (1.70) (1.71)
quality and hence refute the EKC hypothesis. In fact, Suri and
ΔGDP2  0.123*  0.195*  0.001  0.279  0.260  0.279 Chapman (1998) contend that the developed countries shift the
(  1.90) (  2.00) (  0.86) (  1.01) (  0.92) (  0.97) production of pollution-intensive goods to developing countries,
ΔEX/GDP 0.209* 0.305* thus reducing their own emissions. Therefore, factoring in inter-
(2.50) (1.98)
ΔIM/GDP 0.161** 0.203*
national trade weakens the EKC. One reason EKC may not be ob-
(2.98) (2.33) served in some cases is that even though there may exist an un-
_cons 3.616*** 4.067*** 3.989*** 1.646 1.278 1.498 derlying relationship between pollution levels and income, the
(5.23) (5.09) (4.63) (0.39) (0.31) (0.36) observable indicators of environmental quality may continue to
N 960 954 954 912 908 908
worsen due to stock effects.
Low-in- GMM
come Furthermore, the existence of EKC may depend upon the type
countries of environmental indicators chosen. This explains the conflicting
(1) (2) (3) (4) (5) (6) nature of observations made by studies in the past. A con-
PM PM PM CE CE CE
sequential implication of this explanation is that perhaps one must
ΔCE(  1) 0.622*** 0.600*** 0.600***
(4.68) (4.05) (4.07) not put too much emphasis on proving the existence of EKC, be-
ΔPM(  1) 0.842*** 0.817*** 0.820*** cause it may give misleading policy implications. Pollution may
(33.21) (30.90) (28.71) indeed decline over time with technological advances or increas-
ΔTO 0.053*** 0.139**
ing preferences for environmental qualities, but there may be
 T.-H. Le et al. / Energy Policy 92 (2016) 45–55 53

Table 6 relationship running from ΔGDP and ΔGDP2 to ΔPM and ΔTO. The
Long-run and Short-run Causality Test Results. results also suggest that there is a feedback effect-i.e. bidirectional
causal relations-between trade openness and particulate matter
All
emissions for the whole sample as well as different income groups
Environmental Dependent Sources of causation of countries. This finding is maintained using carbon emissions
quality indicator variables (CE) as an indicator of environmental quality.
PM10 ΔGDP, Short- ΔTO Long run In addition, the presence of a long-run causality is indicated by
ΔGDP2 run ΔPM ECT(  1)
ΔGDP, ΔGDP 2
– 5.39 39.32 ***
10.95***
the statistical significance of the estimated coefficient for one
ΔPM 7.87* – 14.48*** 144.99*** period of lagged error correction term. The consistent finding
ΔTO 32.86*** 11.16** – 1.84* across the world sample and sub-samples of different income
CO2 ΔGDP, Short- ΔTO Long run groups suggests long-rum causality running from ΔGDP and
ΔGDP2 run ΔCE
ΔGDP, ΔGDP2 – 11.97** 39.98***
ECT(-1)
6.52**
ΔGDP2 and ΔTO to ΔPM.
ΔCE 34.52*** – 16.69*** 935.61***
ΔTO 35.46*** 6.07** – 5.82**
High-income countries 5. Policy implications
Environmental Dependent Sources of causation
quality indicator variables
PM10 ΔGDP, Short- ΔTO Long run
Interestingly and significantly, our central finding that trade
ΔGDP2 run ΔPM ECT(-1) benefits the environment in high-income countries but harms the
2
ΔGDP, ΔGDP – 2.23 15.10*** 12.01*** environment in low- and middle-income countries is consistent
ΔPM 7.29 – 9.56*** 62.55*** with the popular notion that rich countries dump the pollution
ΔTO 5.45 13.22*** – 2.47**
associated with their consumption on poor countries. The former
CO2 ΔGDP, Short- ΔTO Long run
ΔGDP2 run ΔCE ECT(-1) have outsourced a lot of their environmentally dirty manufactur-
ΔGDP, ΔGDP2 – 2.47 14.41*** 5.92* ing activities to the latter but often remain the major market for
ΔCE 2.75 – 6.02** 58.70*** the manufacturing output of the latter. For example, foreign direct
ΔTO 4.60 12.49*** – 1.03* investment from advanced economies has helped to transform
Middle-income countries
Environmental Dependent Sources of causation
China into a highly polluted factory of the world, which exports
quality indicator variables much of what it produces back to the advanced economies.
PM10 ΔGDP, Short- ΔTO Long run Therefore, our evidence lends some support to calls for rich
ΔGDP2 run ΔPM ECT(-1) countries to provide assistance for the efforts of rich countries to
ΔGDP, ΔGDP2 – 4.79 12.15** 8.00**
*** tackle pollution. To the extent that rich countries are outsourcing
ΔPM 21.14 – 6.72* 495.68***
ΔTO 22.13*** 11.04*** – 10.96*** pollution, there is a case for their contributing to the clean-up of
CO2 ΔGDP, Short- ΔTO Long run the outsourced pollution.
ΔGDP2 run ΔCE ECT(  1) International environmental cooperation is vital for mitigating
ΔGDP, ΔGDP2 – 8.75* 11.20** 6.20** trans-boundary pollution and other negative spill-over effects.
ΔCE 5.68 – 5.97* 453.95***
ΔTO 25.55*** 10.07*** – 2.08*
Furthermore, cooperation based on technology sharing can pro-
Low-income countries mote economically beneficial efficiency gains and innovations
Environmental Dependent Sources of causation (Beghin et al., 1994). Some countries view incorporating environ-
quality indicator variables mental provisions into trade agreement as the most effective way
PM10 ΔGDP, Short- ΔTO Long run
to protect the global environment. These countries include Cana-
ΔGDP2 run ΔPM ECT(  1)
ΔGDP, ΔGDP2 – 3.99 40.41*** 36.85*** da, the US, the European Union, and New Zealand. Among devel-
ΔPM 12.81*** – 12.74*** 28.72*** oping countries, the efforts of Chile to include comprehensive
ΔTO 34.32*** 10.77*** – 30.19*** environmental chapters in its trade agreements are noteworthy
CO2 ΔGDP, Short- ΔTO Long run (OECD, 2007). Trade agreements can strengthen the capacity for
ΔGDP2 run ΔCE ECT(  1)
governments to address environmental issues. In particular, the
ΔGDP, ΔGDP2 – 45.29*** 51.17*** 20.57***
ΔCE 18.57*** – 16.32*** 162.06*** reduction of trade barriers on environmental goods can lead to
ΔTO 25.52*** 10.80*** – 13.21*** increased access to green technologies at lower cost. For instance,
the Trans-Pacific Partnership (TPP) agreement is expected to help
Note: χ2 statistics are reported for the Wald test.
developing countries shift into cleaner industries and transition to
*
indicate rejection of the null hypothesis at the 10% significance level.
**
low-carbon pathways by providing access to green goods, services,
indicate rejection of the null hypothesis at the 5% significance level.
***
indicate rejection of the null hypothesis at the 1% significance level. and investments (Meltzer and Tania Voon, 2014).
On the other hand, some economists believe that trade agree-
ments are unsuitable for tackling environmental issues. The pro-
stock effects from emissions which are irreversible and subject to blem is that not all countries face the same incentives to join trade
hysteresis (Ranjan et al., 2003). agreements with environmental provisions. As such, environ-
The existence of a long-run cointegration vector necessitates mental issues may hinder agreement between the negotiating
the exploration of Granger causality. Table 6 summarises the parties. This is particularly relevant to trade negotiations between
causality estimates for the global sample and separately for low- high-income countries on one hand and low- and middle-income
income, middle-income, and high-income countries. The optimal countries on the other. Low- and middle-income countries often
lag structure is set to three and the significance of the causality face many practical constraints in incorporating the environment
tests is determined by the Wald F-test. into trade negotiations. These include a lack of environmental
For the global sample, the results indicate no short-run re- knowledge among negotiators, opposition from higher levels of
lationship running from particulate matter emissions (ΔPM) to governments, insufficient coordination among trade and en-
economic growth (ΔGDP and ΔGDP2). Based on the statistically vironment ministries, and underdeveloped national environ-
significant and positive coefficients of ΔGDP and ΔGDP2 in the mental legislation. In such scenarios, the outcome of the nego-
ΔPM and ΔTO equations of the world and low-income country tiations many depend heavily on economic size and power, which
sub-samples, one may conclude that there is a short-run transitory is likely to be highly asymmetric. Furthermore, strong political
54 T.-H. Le et al. / Energy Policy 92 (2016) 45–55
will, which is often lacking, is required to negotiate environmental
provisions in trade agreements.
In principle, policies can be designed as if the world was a
single country, using a common charge per unit of emissions that
reflects the cost of global warming. Though such international
agreements might be fraught with free-riding and monitoring
problems, these could be solved by trade sanctions (Beghin et al.,
1994). However, a more effective way is to provide stronger in-
centives to cooperate through international transfers, which in-
troduce a tangible cost for non-compliance. For instance, the TPP
parties have adopted a range of renewable energy subsidies
(Meltzer and Tania Voon, 2014). The Australian government pro-
vides support for the development of renewable energy such as
solar power in order to meet the target of generating 20% of its
electricity from renewable energy sources by 2020. The TPP also
allows for subsidies for research and development on green en-
ergy. However, green subsidies might distort resource allocation so
it is important to take such inefficiencies into account.
In sum, successful negotiation of environmental provisions in
trade agreements requires extensive preparation, close coordina-
tion among trade and environmental actors, setting of priorities,
and reconciling conflicting interests. Environmental provisions are
not a one-off but instead require continuous efforts to ensure ef-
fective integration of trade and environmental issues throughout
the trade agreement. In this connection, developing countries
would benefit from external support, especially in terms of fi-
nancial resources and capacity building, either from their devel-
oped country trade partner or from other institutions such as
development co-operation agencies (OECD, 2007).
6. Conclusion and policy implications
Trade is an engine of economic growth. However, precisely for
that reason, it is often argued that increased trade can have det-
rimental effects on the environment. Global warming, climate
change and more generally, deterioration of environmental qual-
ity, have emerged as world-wide concerns over the past few
decades. But does trade actually harm the environment? Our
paper seeks to empirically explore this critical issue, using parti-
culate matter emissions as the measure of environmental quality.
More specifically, we present new and comprehensive evidence
from a panel dataset of 98 countries encompassing all regions of
the world. The period of investigation spans from 1990 to 2013.
The use of a global panel data set, along with the incorporation of
income level and thus the Environmental Kuznets Curve (EKC) into
the analysis, are our main contributions to the literature. We hope
that the contributions will enrich our understanding of the trade-
environment nexus.
Our main findings are as follows. First, our evidence could not
reject the existence of long-run relationship between trade
openness, particulate matter emissions, and income for the global
sample or for different income groups of countries. The finding is
qualitatively robust to different measures of trade openness. Sec-
ond, we find that in the long run, increased trade causes en-
vironmental degradation for the global sample. However, the re-
sults differ depending on country income level. For high-income
countries, we find the environmental effect of trade openness to
be benign but for middle- and low-income countries, the effect is
harmful. The results are generally robust to different proxies of
trade openness and environmental quality. Third, we find evidence
of a feedback effect between trade openness and particulate
matter emissions for the global sample and for different income
groups of countries. This finding remains when we use carbon
emissions as an alternative indicator of environmental quality.
References
Akbostanci, E., Turut-Asik, S., Tunc, G.I., 2009. The relationship between income and
environment in Turkey: is there an environmental Kuznets curve? Energy
Policy 37, 861–867.
Al-Mulali, U., 2011. Oil consumption, CO2 emission and economic growth in MENA
countries. Energy 36 (10), 6165–6171.
Antweiler, W., Copeland, B., Taylor, S., 2001. Is free trade good for the environment?
Am. Econ. Rev. 91, 877–908.
Arellano, M., Bond, S., 1991. Some tests of specification for panel data: Monte Carlo
evidence and an application to employment equations. Rev. Econ. Stud. 58,
277–297.
Arouri, M.E.H., Youssef, A.B., Mhenni, H., Rault, C., 2012. Energy consumption,
economic growth and CO2 emissions in Middle East and North African coun-
tries. Energy Policy 45, 342–349.
Baek, J., Cho, Y., Koo, W.W., 2009. The environmental consequences of globalization:
a country specific time-series analysis. Ecol. Econ. 68, 2255–2264.
Bai, J., Ng, S., 2004. A panic attack on unit roots and cointegration. Econometrica 72
(4): 1127-1177Baltagi BH (2005) Econometric Analysis of Panel Data. John
Wiley & Sons, New York.
Baltagi, B.H., 2005. Econometric analysis of Panel data, 3rd edition. John Wiley &
sons.
Beghin, J., Roland-Holst, D., Mensbrugghe, D., 1994. A survey of the trade and en-
vironment nexus: global dimensions. OECD J. : Econ. Stud. 23, 167–192, Winter
1994.
Bernauer, T., Koubi, V., 2009. Effects of political institutions on air quality. Ecol.
Econ. 68 (5), 1355–1365.
Bhagwati, J., 2000. On thinking clearly about the linkage between trade and the
environment. Environ. Dev. Econ. 5 (4), 485–496.
Breusch, T.S., Pagan, A.R., 1980. The lagrange multiplier test and its applications to
model specification tests in econometrics. Rev. Econ. Stud. 47, 239–253.
Brunekreef, B., Holgate, S.T., 2002. Air pollution and health. Lancet 360 (9341),
1233–1242.
Boulatoff, C., Jenkins, M., 2010. Long-term nexus between openness, income and
environmental quality. Int. Adv. Econ. Res. 16, 410–418.
Cerrato, M., 2001. Econometric Approaches to Testing PPP. Mimeo, Department of
Economics. London Guildhall University, United Kingdom.
Chang, Y., 2002. Nonlinear IV unit root tests in panels with cross-sectional de-
pendency. J. Econom. 100, 261–292.
Cole, M.A., Elliot, R.J.R., 2003. Determining the trade environment composition
effect: the role of capital, labor and environmental regulations. J. Environ. Econ.
Manag. 46, 363–383.
Coondoo, D., Dinda, S., 2002. Causality between income and emission: A country-
group specific econometric analysis. Ecol. Econom. 40 (3), 351–367.
Coondoo, D., Dinda, S., 2008. The carbon dioxide emission and income: a temporal
analysis of cross-country distributional patterns. Ecol. Econom. 65, 375–385.
Copeland, B.R., Taylor, M.S., 2004. Trade, growth, and the environment. J. Econ. Lit.
42 (1), 7–71.
Copeland, B.R., Taylor, M.S., 2013. Trade and the Environment: Theory and Evi-
dence. Princeton University Press, New Jersey.
Deme, M., 2002. An examination of the trade-led growth hypothesis in Nigeria: A
co-integration, causality, and impulse response analysis. J. Develop. Areas 36
(1), 1–15.
Di Iorio, F., Fachin, S., 2007. Testing for breaks in cointegrated panels-with an ap-
plication to the feldstein-horioka puzzle. economics: The open-access. Open-
Assess. E-J. 1 (14), 1–23.
Dinda, S., Coondoo, D., Pal, M., 2000. Air quality and economic growth: An empirical
study. Ecol. Econ. 34 (3), 409–423.
Dinda, S., 2004. Environmental kuznets curve hypothesis: A survey. Ecol. Econ. 49
(4), 431–455.
Dinda, S., Coondoo, D., 2006. Income and emission: a panel-data based cointegra-
tion analysis. Ecol. Econ. 57, 167–181.
Engle, R.F., Granger, C.W.J., 1987. Co-integration and error correction: Representa-
tion, estimation and testing. Econometrica 55, 251–276.
Esty, D.C., 2001. Bridging the trade-environment divide. J. Econ. Perspect. 15 (3),
113–130.
Frankel, J., Rose, A., 2005. Is trade good or bad for the environment? Sorting out the
causality. R. Econ. Stat. 87 (1), 85–91.
Frankel, J., Romer, D., 1999. Does trade cause growth? Am. Econ. Rev. 89, 379–399.
Guloglu, B., Ivrendi, M., 2008. Output fluctuations: Transitory or permanent? The
case of Latin America. Appl. Econ. Lett. 17 (4), 381–386.
Haggar, M.H., 2012. Greenhouse gas emissions, energy consumption and economic
growth: a panel cointegration analysis from Canadian industrial sector per-
spective. Energy Econ. 34, 358–364.
Halicioglu, F., 2009. An econometric study of CO2 emissions, energy consumption,
income and foreign trade in Turkey. Energy Policy 37, 1156–1164.
Hamit-Haggar, M., 2012. Greenhouse gas emissions, energy consumption and
economic growth: A panel cointegration analysis from Canadian industrial
sector perspective. Energy Econ. 34 (1), 358–364.
Harris, R.G., Robertson, P.E., Xu, J.Y., 2011. The international effects of China’s
growth, trade and education booms. World Econ. 34 (10), 1703–1725.
Herrerias, M.J., Orts, V., 2011. The driving forces behind China’s growth. Econ.
Transit. 19 (1), 79–124.
Hye, Q.M.A., 2012. Long term effect of trade openness on economic growth in case
of Pakistan. Qual. Quant. 46 (4), 1137–1149.
 T.-H. Le et al. / Energy Policy 92 (2016) 45–55
Im, K.S., Pesaran, M.H., Shin, Y., 2003. Testing for unit roots in heterogeneous pa-
nels. J. Econ. 115, 53–74.
Jaunky, V.C., 2011. The CO2 emissions-income nexus: evidence from rich countries.
Energy Policy 39, 1228–1240.
Kellenberg, D.K., 2009. An empirical investigation of the pollution haven effect with
strategic environment and trade policy. J. Int. Econ. 78, 242–255.
Kim, D., 2011. Trade, growth and income. J. Int. Trade Econ. Dev. 20, 677–709.
Kim, D., Lin, S., 2009. Trade and growth at different stages of economic growth. J.
Dev. Stud. 45, 1211–1224.
Lean, H.H., Smyth, R., 2010. CO2 emissions, electricity consumption and output in
ASEAN. Appl. Energy 87 (6), 1858–1864.
Lee, H., Verances, J.B., Song, W., 2009. The Tourism-Environment Causality. Int. J.
Tour. Sci. 9 (3), 39–48.
Levin, A., Lin, C.F., Chu, C., 2002. Unit root tests in panel data: Asymptotic and finite-
sample properties. J. Econom. 108, 1–24.
Liargovas, P.G., Skandalis, K.S., 2012. Foreign direct investment and trade openness:
The case of developing economies. Soc. Indic. Res. 106 (2), 323–331.
Managi, S., Jena, P.R., 2008. Environmental productivity and Kuznets curve in India.
Ecol. Econ. 65, 432–440.
Managi, S., Kumar, S., 2009. Trade-induced technological change: analyzing eco-
nomic and environmental outcomes. Econ. Model. 26, 721–732.
Mehrara, M., Karsalari, A.R., Musai, M., 2014. The relationship among Income,
openness and environmental quality: An ARDL approach for the case of Iran.
Int. J. Acad. Res. Bus. Soc.Sci. 4 (5), 32–40.
Meltzer, J.P., 2014. The Trans-Pacific Partnership Agreement, the environment and
climate change. In: Tania Voon (Ed.), Trade Liberalisation and International Co-
operation: A Legal Analysis of the Trans-Pacific Partnership Agreement. Edward
Elgar.
Miah, M.D., Masum, M.F.H., Koike, M., Akther, S., Muhammed, N., 2011. Environ-
mental Kuznets Curve: the case of Bangladesh for waste emission and sus-
pended particulate matter. Environmentalist 31 (1), 59–66.
Moon, H.R., Perron, B., 2004. Testing for a unit root in panels with dynamic factors.
J. Econom. 122 (1), 81–126.
Newey, W.K., West, K.D., 1994. Automatic lag selection in covariance matrix esti-
mation. Rev. Econ. Stud. 61, 631–654.
Nowak, D.J., Crane, D.E., Stevens, J.C., 2006. Air pollution removal by urban trees and
shrubs in the United States. Urban For. Urban Green. 4 (3), 115–123.
OECD, 2007. Environment and Regional Trade Agreements. OECD Publishing, Paris.
Ozcan, B., 2013. The nexus between carbon emissions, energy consumption and
economic growth in Middle East countries: A panel data analysis. Energy Policy
62, 1138–1147.
Pao, H.T., Tsaim, C.M., 2010. CO2 emissions, energy consumption and economic
growth in BRIC countries. Energy Policy 38, 7850–7860.
Persyn, D., Westerlund, J., 2008. Error Correction Based Cointegration Tests for
Panel Data. Stata J. 8, 232–241.
Pesaran, M.H., 2004. General diagnostic tests for cross section dependence in pa-
nels. University of Cambridge, England, p. 0435.
Pesaran, M.H., 2007. A simple panel unit root test in the presence of cross-section
55
dependence. J. Appl. Econom. 22, 265–312.
Pesaran, U., Yamagata, T., 2008. A bias-adjusted LM test of error cross-section in-
dependence. Econom. J. 11, 105–127.
Phillips, P.C.B., Sul, D., 2003. Dynamic panel estimation and homogeneity testing
under cross section dependence. Econom. J. 6, 217–259.
Plassmann, F., Khanna, N., 2006. Preferences, technology, and the environment:
understanding the environmental Kuznets curve hypothesis. Am. J. Agric. Econ.
88, 632–643.
Ranjan R., Shortle J.S., Marshall E.P. (2003) The Relevance and Implications of the
Environmental Kuznets Curve Under Stock Effects and Non-Linearities: A
Hysteresis Based Approach. In: 2003 Annual meeting, July 27-30, Montreal,
Canada (No. 22147). American Agricultural Economics Association (New Name
2008: Agricultural and Applied Economics Association).
Salvador, P., Artíñano, B., Viana, M., Alastuey, A., Querol, X., 2012. Evaluation of the
changes in the Madrid metropolitan area influencing air quality: Analysis of
1999–2008 temporal trend of particulate matter. Atmos. Environ. 57, 175–185.
Shabaz, M., Tiwari, A.K., Nasir, M., 2013. The effects of financial development,
economic growth, coal consumption and trade openness on CO2 emissions in
South Africa. Energy Policy 61, 1452–1459.
Shandilya, K.K., Khare, M., Gupta, A.B., 2007. Suspended particulate matter dis-
tribution in rural-industrial Satna and in urban-industrial South Delhi. Environ.
Monit. Assess. 128 (1–3), 431–445.
Smith, L.V., Leybourne, S., Kim, T., Newbold, P., 2004. More powerful panel data unit
root tests with an application to mean reversion in real exchange rates. J. Appl.
Econom. 19, 147–170.
Squalli, J., Wilson, K., 2011. A new measure of trade openness. World Econ. 34 (10),
1745–1770.
Squalli, J., Wilson, K., Hugo, S., 2010. An analysis of market access. Appl. Econ. 42
(14), 1833–1844.
Suri, V., Chapman, D., 1998. Economic growth, trade and the energy: implications
for the environmental Kuznets curve. Ecol. Econ. 25, 195–208.
Tayebi, S.K., Younespour, S., 2012. The effect of trade openness on environmental
quality: Evidence from Iran’s trade relations with the selected countries of the
different blocks. Iran. Econ. Rev. 16 (32), 19–40.
Wang, S.S., Zhou, D.Q., Zhou, P., Wang, Q.W., 2011. CO2 emissions, energy con-
sumption and economic growth in China: a panel data analysis. Energy Policy
39 (9), 4870–4875.
Westerlund, J., 2007. Testing for error correction in panel data. Oxford Bull. Econ.
Stat. 69, 709–748.
World Development Indicators (WDI) (2014) Retrieved on 10 January 2015. Avail-
able at: data.worldbank.org/sites/default/files/wdi-2014-book.pdf.
Zellner, A., 1962. An efficient method of estimating seemingly unrelated regressions
and tests for aggregation bias. J. Am. Stat. Assoc. 57, 348–368.
Zellner, A., 1963. Estimators for seemingly unrelated regression equations: Some
exact finite sample results. J. Am. Stat. Assoc. 58, 977–992.
Zellner, A., Huang, D.S., 1962. Further properties of efficient estimators for see-
mingly unrelated regression equations. Int. Econ. Rev. 3, 300–313.