J. Japanese Int.

Economies 26 (2012) 167–178

Contents lists available at SciVerse ScienceDirect

Journal of The Japanese and

International Economies
journal homepage: www.elsevier.com/locate/jjie

Carbon emissions, trade liberalization,

and the Japan–ASEAN interaction: A group-wise examination
Cemal Atici ⇑,1
Department of Agricultural Economics, Adnan Menderes University, 09100 Aydin, Turkey
Institute of Developing Economies-Japan External Trade Organization (IDE-JETRO), Chiba, Japan

a r t i c l e i n f o a b s t r a c t

Article history: Atici, Cemal—Carbon emissions, trade liberalization, and the

Received 26 October 2010 Japan–ASEAN interaction: A group-wise examination
Revised 19 July 2011
Available online 9 August 2011 As in any modern economy, trade is central to the progress of the
economy in the Association of Southeast Asian Countries (ASEAN)
JEL classification: region, but environmental degradation occurs with globalization.
F18 Using panel data from the period 1970–2006, this study examines
Q53 the interaction between trade and the environment in terms of car-
C23 bon emissions for the group of ASEAN countries. The results demon-
strate that CO2 emissions display an inverted-S shape in the region.
Keywords:
In general, exports as a percentage of the gross domestic product
Trade
Pollution
(GDP) are main contributors to carbon emissions in the developed,
Environmental Kuznets curve developing and late-developing ASEAN countries. The study found
ASEAN no evidence for the Foreign Direct Investment’s (FDI) deteriorating
Japan impact on environmental quality. Moreover, Japan’s imports from
FDI the region do not cause pollution while China’s imports stimulate
Panel data the pollution per capita. J. Japanese Int. Economies 26 (1) (2012)
Environment 167–178. Department of Agricultural Economics, Adnan Menderes
University, 09100 Aydin, Turkey; Institute of Developing Econo-
mies-Japan External Trade Organization (IDE-JETRO), Chiba, Japan.
Ó 2011 Elsevier Inc. All rights reserved.

1. Introduction

The increasing flow of trade helps countries make progress in economic development. However,
intensive trade flow can harm environmental quality as a result of higher production levels and

⇑ Address: Department of Agricultural Economics, Adnan Menderes University, 09100 Aydin, Turkey.
E-mail address: catici@adu.edu.tr
1
Visiting Research Fellow.

0889-1583/$ - see front matter Ó 2011 Elsevier Inc. All rights reserved.
doi:10.1016/j.jjie.2011.07.006
168 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178

greater exploitation of natural resources. Liberalized trade policies, income level, energy use, inflow of
foreign direct investment (FDI) and regulations impact production, consumption, and trade and, con-
sequently, emission levels. Trade liberalization may have several effects on the environment, such as
when production of goods shifts to the developing world as a result of lax regulations and lower costs.
However, as trade liberalization leads to higher income, the resulting wealth can raise environmental
consciousness. Trade is important to the economies of countries in the Association of Southeast Asian
Countries (ASEAN), and Japan is an important trade partner in this region (Comtrade, 2010), but
increasing trade flow will impact the environmental quality in ASEAN member countries and those
of its trade partners.
The interaction between income level and environmental decay is usually examined using the envi-
ronmental Kuznets curve (EKC). Grossman and Krueger’s (1991) study of the interaction between air
quality and income is an early example of these kinds of studies. Shafik and Bandyopadhyay (1992)
and Panayotu (1995) further examined the relationship between growth and the environment, and
many other studies have examined the Kuznets curve for different pollutants. For instance, Torras
and Boyce (1998), Anderson (2001), Paudel et al. (2005) examined water pollution employing the Kuz-
nets curve. Copeland and Taylor (2004) reviewed the interaction between trade and the environment,
and other studies, such as Cole (2003, 2004) and Atici (2009), carried out empirical studies on trade-re-
lated pollution. Although there is a large body of literature on the relationship between emission levels
and income, the examination of the interaction between trade and pollution requires further scrutiny.
Specifically, pollutants caused by increasing trade flow need to be evaluated in an extended view. This
study uses an extended EKC and panel data for ASEAN countries to explore the determinants of envi-
ronmental decay in ASEAN countries as a group of countries that are focused on trade flow. The results
of this study will contribute to the design of sustainable environmental trade policies in the region.

2. Related literature

Recent studies have examined the EKC in a panel data context as more data has become available
on the subject. Selden and Song (1994) investigated the EKC using a cross-national panel of data on
emissions of four important air pollutants—suspended particulate matter, sulfur dioxide, oxides of
nitrogen, and carbon monoxide—and found that per-capita emissions of all four pollutants exhibit
inverted-U relationships with per-capita gross domestic product (GDP). Matyas et al. (1998) utilized
panel data sets of several countries for the period 1970–1993 with two-way fixed and random effects
models; however, Matyas found no evidence for the EKC’s viability. Barro’s study (2000) indicated that
the EKC hypothesis does not explain the bulk of variations across countries or over time. Thornton’s
study (2001) of 96 countries over the post-war period suggested that the relationship between income
inequality and development is an inverted-U, as hypothesized by Kuznets. Perman and Stern (2003)
used cointegration analysis to test the EKC hypothesis using sulfur emissions and GDP data for 74
countries over a span of 31 years. The results showed that the EKC does not support the case of sulfur
emissions. Halkos (2003) used panel data for 73 OECD and non-OECD countries for the period 1960–
1990 and could not reject the EKC hypothesis in the case of the dynamic estimation, but found no sup-
port for an EKC when using a random coefficients model as the turning points ranged from $2805 to
$6230 per capita. Mazzanti et al. (2008) analyzed the EKC for Italy utilizing a panel dataset based on
the national accounts matrix for 1990–2001 and found mixed evidence supporting the EKC hypothe-
sis; some of the pollutants, such as two greenhouse gases (CO2 and CH4), produced inverted-U shaped
curves with coherent within-range turning points, but other pollutants showed an N-shaped relation-
ship. Lee et al. (2009) applied the dynamic panel generalized method of moment’s technique to reex-
amine the EKC hypothesis for carbon dioxide emissions and found evidence in support of the EKC
hypothesis for CO2 emissions in a global data set of middle-income countries and American and Euro-
pean countries, but not in other income levels or regions. Therefore, the hypothesis that one size fits all
for the EKC cannot be supported.
The interaction between trade and the environment has been scrutinized in several studies.
Muradian and Martinez-Alier (2001) argued that neither environmental economics nor ecological eco-
nomics take into account the structural conditions that determine the international trade system.
Based on new empirical evidence on material flows, they stressed the notion of environmental
 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178 169

cost-shifting. Cole (2003) assessed the strength of the EKC, which posits an inverted-U relationship be-
tween per-capita income and pollution and found that the inverted-U relationship between per-capita
income and emissions is reasonably robust and that there was little evidence to suggest that trade pat-
terns are a significant determinant of the inverted-U shape. Dobson and Rablogan (2009) tested the
Kuznets hypothesis in the context of trade liberalization using data for Latin America and found evi-
dence consistent with the Kuznets hypothesis. The curvilinear relationship they found between trade
openness and internal economic inequality suggests that Latin American countries should continue to
pursue trade liberalization measures but should also introduce redistribution policies to ease the ad-
verse consequences of liberalization. Atici (2009) examined the impact of factors like GDP per capita,
energy use per capita, and trade openness on carbon dioxide emissions per capita in the Central and
Eastern European countries using the extended EKC with panel data from 1980 to 2002 for Bulgaria,
Hungary, Romania, and Turkey. The results confirmed the existence of an EKC for the region such that
CO2 emissions per capita decrease over time as the per-capita GDP increases. The trade openness var-
iable suggested that globalization did not facilitate the emission levels in the region.
Few studies have examined the interaction between trade and the environment the ASEAN coun-
tries, although some studies have been carried out that involve some of the countries in the region. For
instance, Coondoo and Dinda (2002) examined the relationship between income and CO2 emissions
based on a Granger causality test with cross-country panel data on per-capita income and the corre-
sponding per-capita CO2 emission data. Their results indicated that there were three different types of
causality relationships holding for different country groups. For the developed country groups of
North America and Western Europe, the causality was found to run from emissions to income. For
the country groups of Central and South America, Oceania and Japan, they found causality from
income to emissions. For the country groups of Asia and Africa, the causality was bi-directional.
Tamazian et al. (2009) used a standard reduced-form modeling approach to investigate the links be-
tween economic development and environmental quality as well as the link between financial devel-
opment and environmental quality. Using panel data over the period 1992–2004, they found that both
economic and financial developments are determinants of the environmental quality in BRIC econo-
mies and that a higher degree of economic and financial development decreases environmental
degradation.

3. Trade and environment in the ASEAN region

The export of goods is a significant indicator of economic progress in a region. Table 1 shows the
percentage of exports to current GDP for ASEAN countries. Singapore and Malaysia have the highest
percentages, while other developing members’ percentages vary between 16% and 68.75%. Compared
to other regions, the ASEAN region has a high level of exports as a percentage of GDP (World Bank,
2010a), which indicates that the ASEAN members’ economies are export-driven. Japan is the largest
trading partner of ASEAN countries, with a share of 12.4% of ASEAN’s total trade (ASEAN Secretariat,
2010).

Table 1
Export indicators in the region $1000, 2008. Source: World Bank, 2010a; Comtrade, 2010.

Countries Export GDP Share of Export to GDP, Export to Share of Japan in Total Exp.,
% Japan %
Japan 776.205.583 4.910.840.000 15.80 – –
Brunei 7.667.929 11.470.702 66.84 2.337.531 30.48
Cambodia 4.089.000 10.354.122 39.49 32.138 0.78
Indonesia 136.181.163 510.730.000 26.66 27.743.856 20.37
Laos 922.690 5.543.146 16.64 18.070 1.95
Malaysia 198.123.100 221.773.000 89.33 21.519.815 10.86
Myanmar 6.337.870 14.936.419 42.43 315.451 4.97
Philippines 48.669.501 166.909.000 29.15 7.707.063 15.83
Singapore 336.633.273 181.948.000 185.01 16.659.803 4.94
Thailand 172.477.564 272.429.000 63.31 19.878.818 11.52
Vietnam 62.324.209 90.644.972 68.75 8.467.749 13.58
170 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178

350000
Brunei
300000
Cambodia
CO2 Emissions, kt

250000 Indonesia
Laos
200000
Malaysia
150000 Myanmar
Philippines
100000
Singapore
50000 Thailand

0 Vietnam
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Year

Fig. 1. CO2 emissions in ASEAN, 1970–2006, kt. Source: World Bank, 2010a.

The region faces several environmental problems, such as a rapid rise in population. The ASEAN
Environmental Report (2009) indicates that increasing urbanization and industrial activities are the
two major contributors to air pollution in region. However, ASEAN has been relatively active com-
pared to other nations in the region with regard to environmental policies. ASEAN has created envi-
ronmental programs with the guidance of UNEP that include nature conservation, industry and
environment, marine environment, and training and education in the region (Shiroyama, 2007). In
addition, there has been a growing amount of bilateral and regional technological cooperation in
the region. Institutions such as 10+3 (ASEAN + China, Japan, and Korea) and the Asia–Pacific Partner-
ship on Clean Development and Climate (APP) serve as good platforms from which to improve coop-
eration in the region (Kameyama et al., 2008).
Fig. 1 provides an overview of CO2 emissions in the region. CO2 emissions have an increasing trend
in all member countries except Brunei, and the emissions have a noticeably increasing trend in Indo-
nesia, Malaysia, Thailand, Vietnam, and Singapore. The per-capita emission levels (Fig. 2) are decreas-
ing in Brunei and increasing trend in Malaysia, Thailand, Indonesia, and Vietnam. Fig. 3 presents the
share of polluting industries’ exports (iron & steel, chemicals, lime and cement) to total exports over
the years. Only the Philippines’ export share decreased over time, while other countries displayed
increasing trends, indicating that the region may have pollution haven feature.

80
Brunei
CO2 Emissions Per Capita, kg

70
Cambodia
60 Indonesia
50 Laos

40 Malaysia
Myanmar
30
Philippines
20
Singapore
10 Thailand

0 Vietnam
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006

Year

Fig. 2. CO2 emissions per capita in ASEAN, 1970–2006, kg. Source: World Bank, 2010a.
 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178 171

14

12
Brunei
10 Indonesia
Malaysia
8
% Philippines
6
Singapore
4 Thailand

0
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Year

Fig. 3. The share of polluting industries in total exports in ASEAN, 1967–2006. Source: Comtrade, 2010.

4. Method

This study models the interactions among income, trade and environment using the environmental
Kuznets curve and several additional economic and qualitative indicators, such as export share, FDI,
tariffs and regulation quality. The EKC suggests that, as development progresses, environmental dam-
age also increases as a result of heavier use of natural resources and high levels of emissions; however,
as economic growth continues, a cleaner habitat becomes more valuable and a better environment
becomes a priority (Munasinghe, 1999). Therefore, in the early stages of economic growth environ-
mental degradation increases, but after a certain level of income is attained, the degradation decreases
and improvement starts (Markandya et al., 2002). Some studies (Suri and Chapman, 1998) have in-
cluded a cubic term to determine whether an N-shaped curve is observed after income level increases
significantly, resulting in environmental degradation’s beginning again because of luxury spending.
As the Pollution Haven Hypothesis indicates, trade and environmental degradation are also closely
related to the process of globalization, and differences in environmental regulations may provide a
comparative advantage in pollution-intensive production among countries (Cole, 2004). Trade liberal-
ization also provides the efficient use of resources and minimizes the quantity of inputs needed per
unit of output, reducing waste (Cole, 2000). This study applies the Pollution Haven Hypothesis to
the ASEAN countries to determine whether the members of this bloc respond to economic growth
and increasing trade flow that is due to globalization and trade liberalization in a similar manner.
The model is estimated utilizing panel data related to the environmental pollutants originating from
trade activities. Considering the a priori information on these types of models, and based on certain
model selection criteria, such as Ramsey’s regression specification error test (Reset), the double log
model is specified. The choice of variables is based on either Schwarz Bayesian Information Criteria
(SBIC), which has the lowest value, or the highest adjusted R2. Since the region is heterogeneous in
terms of the level of development, two models are estimated for the study. The first model utilizes
time-invariant variables, such as regulation quality and tariffs, for the whole region based on
variations of income. The second model examines the emission levels in a group-wise estimation.
Therefore, the general form of the model used in this study can be represented as

lnedASEANit ¼ b0 þ lit þ kit þ b1 lngdpcit þ b2 ðlngdpcit Þ2 þ b3 ðlngdpcit Þ3 þ b4 lnr e=gdpit

þ b5 lnr eJ=te þ b6 r lnfdi=gdpit þ b7 ln tariffit þ b8 rqit þ eit ð1Þ
Based on income level and development, the region is divided into three groups: the developed
group, consisting of Brunei and Singapore (D2); the developing group, consisting of Indonesia, Malay-
sia, Philippines, and Thailand (D4); and the late-developing group, consisting of Cambodia, Laos,
Myanmar, and Vietnam (LD4). For each group, the following form is specified:
172 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178

lnedit ¼ b0 þ lit þ kit þ b1 lngdpcit þ b2 ðlngdpcit Þ2 þ b3 ðlngdpcit Þ3 þ b4 lnr e=gdpit

þ b5 lnr pe=teit þ b6 lnr eJ=te þ b7 lnr peJ=eJ it þ b8 r lnfdi=gdpit þ eit i
¼ D2; D4; LD4 and t ¼ 1970; . . . ; 2006: ð2Þ

where
ed: Environmental degradation (CO2 per capita, kg);
gdpc: GDP per capita, PPP, in real terms;
r_e/gdp: Ratio of the current exports to the current gross domestic product in reporting countries;
r_pe/te: Ratio of the polluting exports (iron & steel, chemicals, lime & cement) to the total exports
in reporting countries;
r_eJ/te: Ratio of the exports to Japan to the total exports in reporting countries;
r_peJ/te: Ratio of the polluting exports to Japan to the total exports to Japan in reporting countries;
r_fdi/gdp: Ratio of the net FDI inflow to the current GDP in reporting countries, in US$;
rq: Regulation quality, which takes the value of 1 for counties with a positive value and 0
otherwise;
l: Individual effects;
k: Time effect.

Since GDP per capita reflects a country’s income and level of development, it is expected that the
initial level of income induces pollution; however, as income rises, environmental degradation de-
creases because of the level of environmental consciousness and technology that utilities cleaner en-
ergy. The region consists of mainly export-oriented countries so, as the ratio of current exports to
current GDP and exports increases, it is expected that emission levels increase as well. Japan has
strong trade ties with some of the members in the region, so trade with Japan may result in higher
emissions levels. However, Japan’s strict regulations for both industrial and agricultural products
(FAO, 2004; JETRO, 2010) may stimulate the use of cleaner technologies in the region. The effect of
FDI is uncertain; if FDI inflow brings cleaner technologies, we can expect a negative sign for this var-
iable, but if FDI inflow increases pollution, it may have a pollution-haven effect. A tariff variable is used
as a proxy for the protection level; it is expected that countries with high tariffs have higher emissions
because of inefficient use of resources. Since regulation quality reflects a county’s commitment to
reducing environmental externalities, we can expect that countries with better regulations will have
less environmental degradation.
This study utilizes panel data over the period 1970–2006. The data used for this study comes from
various international sources. The pollutant data (CO2), current GDPs, FDI, population, regulatory qual-
ity are from the World Bank (2010a,b); GDPs based on PPP are from the Penn World Table (2010); tar-
iff levels are from the WTO (2006); and the export and import values are from Comtrade (2010) of the
UN, based on the four-digit SITC Rev 1 classification.

5. Results

Table 2 presents the summary statistics for the data used in the study. The data reveal large vari-
ations in per-capita income levels.
The CO2 emissions panel regression is reported in Tables 3–6. The tables present the Random
Effects (REM) and Fixed Effects (FEM) estimations. The t values reflect the heteroscedasticity consis-
tent (robust) standard errors. When autocorrelation is observed, it is corrected using AR1 estimation
for both REM and FEM. In estimating panel data models, either a fixed effects model (FEM) or random
effects model (REM) can be used. In the FEM, unobservable individual effects are assumed to be fixed
parameters to be estimated. The REM assumes that individual effects can be included as a part of the
error term, assuming there is no correlation between the error term and other regressors. If the num-
ber of individual units is large, FEM would lead to the loss of a degree of freedom because of the use of
additional dummy variables. In addition, FEM cannot estimate time invariant variables. The Hausman
specification test (HS) can be used to determine which model to choose (Baltagi, 2008; Wooldridge,
2002). More specifically, in a panel regression form:
 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178 173

Table 2
Summary statistics.

Variable Obs. Mean Std. dev. Min. Max.

co2pc 370 4.78 9.87 .004 67.36
gdpc 370 6311.60 9761.44 122.85 56574.02
r_e/gdp 311 47.79 40.83 1.54 194.09
r_pe/te 296 .025 .028 0 12.46
r_eJ/te 365 19.86 17.13 0.015 79.31
r_peJ/te 322 0.30 0.50 0 4.57
r_fdi/gdp 311 2.95 3.76 2.75 20.06
tariff 370 27.44 20.37 9.70 83
rq 370 .50 .50 0 1

Table 3
ASEAN CO2 emissions panel regression results (Dependent variable ln-co2 per capita).

ASEAN-ALL
REM FEM
c 5.59 –
(1.86)
lngdpc 6.46 6.49
(6.00) (5.95)
lngdpc2 1.05 1.06
(7.60) (7.60)
lngdpc3 0.04 0.04
(8.19) (8.26)
lnr_exp/gdp 0.33 0.30
(5.73) (5.14)
lnr_reJ/te 0.27 0.29
(5.49) (5.76)
lnr_fdi/gdp 0.03 0.03
(1.84) (1.89)
lntariff 0.76 –
(3.69)
regulation-q 0.52(1.79) –
R2 0.84 0.98
LM (BP) 2603
HS 33.05
N 264 264
TP 148 (1983); 10782(1973)
2009:15652

yit ¼ a þ X 0it b þ uit ð3Þ

where (i) denotes countries and (t) denotes time. The disturbances can be represented as
uit ¼ li þ v it ð4Þ

where l represents the unobservable individual effects and v represents the remaining disturbance. In
the FEM, the li is assumed to be the fixed parameters to be estimated, and Xit is assumed to be inde-
pendent of vit. Therefore, the regression becomes
yit ¼ dli þ bxit þ v it ð5Þ
If the li is assumed to be random and independent of vit, the REM can be used, such that
yit ¼ a þ bxit þ li þ v it ð6Þ
Table 3 shows the result of the overall ASEAN carbon emission panel regression. The HS test favors
FEM, but the estimations have similar results. According to the findings, the carbon emissions displays
an inverted-S shaped curve, indicating that the emission levels tend to be low in the beginning of
174 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178

Table 4
ASEAN-D2 CO2 emissions panel regression results. (Dependent variable ln-co2 per capita).

Variables ASEAN-D2
REM FEM
c 123.38 
(2.13)
lngdpc 28.97 27.07

(2.13) (4.33)
lngdpc2 3.21 2.98
(2.21) (4.38)
lngdpc3 0.11 0.10
(2.27) (4.34)
lnr_e/gdp 0.62 0.63
(2.36) (8.23)
lnr_pe/te 0.32 0.36
(2.68) (24.6)
lnr_ej/te 0.25 0.10
(2.05) (2.03)
lnr_pej/ej 0.02 0.01
(0.10) (2.11)
lnr_fdi/gdp 0.08 0.08
(1.58) (30.21)
R2 0.73 0.74
LM (BP) 23.33
HS 1.13
TP 2799 (1974); 34834 (2002)
2009:48854
N 52 52

economic development and, after a certain level of per-capita income is achieved, to increase. Then
further economic development results in decreasing per-capita emission levels. The turning point of
income at which emission levels start to decrease is US$14,106. Given that average income per capita
based on PPP was US$15,652 in 2009 (World Bank, 2010a,b), this finding indicates that the turning
point has just been reached in the region. The ratio of exports to GDP has a deteriorating effect on
emission levels. Given the export-led characteristics of the region, this result is expected. The FDI
has a small negative but significant effect, indicating that FDI does not tend to increase pollution levels
in the region. In terms of the region’s trade with Japan, there is no evidence that the pollution exports
to Japan increase emission levels in the region. In addition, it seems that the difference in tariff levels
has a significant deteriorating impact on the emission levels. This finding demonstrates that countries
that have higher protection levels fail to utilize resources efficiently and, in some cases, inefficient
technologies that lead to higher emissions are used. On the other hand, differences in regulations have
an unexpectedly positive effect on emission levels, demonstrating that variations in regulations do not
deter the region’s economic development and suggesting that monitoring and implementation are
central to achieving the goals that regulation supports.
According to the results of group wise estimations (Table 4), in group D2, the emission levels
exhibit an inverted S-shaped curve, meaning that the emission levels first decrease and then increase
when incomes reach a high level, but decrease again at higher levels of income. The turning points for
incomes are $2799 and $34,834. The ratio of exports to GDP has a polluting effect, confirming the
export-based pollution. However, the ratio of polluting exports to total exports does not have such
an impact, meaning that this group’s exports consist primarily of products that are not included in
the polluting export segment. FDI and exports to Japan, on the other hand, have alleviated pollution
levels.
The group D4 also exhibits an inverted S-shaped curve (Table 5), meaning that the emission levels
start to decrease at higher income levels (after $26,808). The turning points for incomes are $152 and
$26,808. Given that the current average income is $7037 per capita in the D4 region, it is clear that the
emission levels will continue to rise at least in the medium term. Both the ratio of exports to GDP and
 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178 175

Table 5
ASEAN-D4 CO2 emissions panel regression results. (Dependent variable ln-co2 per
capita).

Variables ASEAN-D4
REM FEM (AR1)
c 8.01 –
(0.99)
lngdpc 4.70 2.32
(0.57) (5.11)
lngdpc2 0.72 0.43
(1.89) (6.35)
lngdpc3 0.03 0.01
(1.94) (5.77)
lnr_e/gdp 0.63 0.52
(11.05) (275.78)
lnr_pe/te 0.21 0.15
(6.13) (5.45)
lnr_ej/te 0.02 0.03
(0.39) (0.70)
lnr_pej/ej 0.04 0.03
(1.95) (1.77)
lnr_fdi/gdp 0.01 0.01
(0.06) (1.04)
R2 0.84 0.95
HS 8.02
LM (BP) 1460
TP 152(1970); 26808(–)
2009:7037
N 137 137

Table 6
ASEAN-LD4 CO2 Emissions Panel Regression Results (Depen-
dent variable ln-co2 per capita).

Variables ASEAN-LD4
REM (AR1) FEM (AR1)
c 303.47 –
(3.29)
lngdpc 46.98 22.68
(2.69) (4.38)
lngdpc2 7.47 3.61
(2.78) (4.45)
lngdpc3 0.37 0.17
(2.74) (4.25)
lnr_e/gdp 0.05 0.20
(0.49) (2.34)
lnr_ej/te 0.01 0.18
(0.014) (2.20)
lnr_fdi/gdp 0.03 0.09
(1.04) (3.23)
R2 0.41 0.88
LM (BP) 5897
HS 13.09
TP 154(1985); 4268(–)
2009:2089
N 80 80

the ratio of exports to total exports have polluting effects on the region, suggesting the region’s
pollution-haven feature. Exports to Japan, on the other hand, have no deteriorating impact on
176 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178

Table 7
ASEAN-6 CO2 Emissions Panel regression results (Dependent variable ln-co2 per
capita).

Variables ASEAN-6 FEM

(1) (2) (3)
lngdpc 9.69 24.49 10.16
(5.06) (6.44) (4.01)
lngdpc2 1.46 3.00 1.54
(6.25) (6.97) (5.23)
lngdpc3 0.06 0.11 0.06
(6.67) (7.38) (5.97)
lnr_reJ/te 0.07 – –
(2.79)
lnr_reUS/te – 0.06 –
(1.81)
lnr_reCN/te – – 0.02
(2.63)
R2 0.97 0.98 0.95
LM (BP) 1829 2310 5277
HS 30.97 46.00 46.95
N 222 149 183

pollution levels, suggesting that Japanese imports do not contribute to the carbon emissions in the re-
gion. FDI has an insignificant impact, meaning that FDI mostly invests in non-polluting sectors in the
group.
The LD4 group exhibits a similar inverted S-shaped curve (Table 6), indicating that the emission
levels are currently increasing. Given the late-developing feature of the region, this finding is not sur-
prising. The turning point in income at which pollution starts to increase is found to be $154 and the
turning point for the decrease is $4268. Given that current income is $2089 in LD4, it is expected that
the emissions will increase for some time. The ratio of exports to GDP has a significant polluting
impact in the region, while FDI and trade with Japan have alleviating impacts.
In order to determine which export destinations contribute to the pollution another estimation is
made, this time including the two other major trading partners (US and China) (Asean Secretariat,
2010). Since the focus of this regression is to determine the polluting destinations, only gdpcs and
ratios of exports to Japan (lnr_expJ/te), the US (lnr_expUS/te) and China (lnr_expCN/te) to the total ex-
ports of the reporting ASEAN members were included. This experiment is carried out using D2 plus D4
members (ASEAN-6) based on the consistent export data for the specified export markets. The result of
the fixed effect estimation (Table 7) confirms the shape of the EKC as found in Table 1. In addition, in
terms of export destinations, the results indicate that the exports to the China stimulate the pollution
level per capita while those to Japan and the US do not have any polluting impacts.

6. Japan’s environmental standards and trade

Japan has higher standards in terms of trade and environment. For instance, according to the Envi-
ronmental Performance Index (EPI, 2011) Japan’s score is highest in the region. Recently, there is an
increasing concern related to the processes and production methods (PPMs) of commodities produced
and traded, in order to reduce the negative impact on the environment. Examples of this type of prod-
uct requirements include product regulations that restrict products produced by certain facilities, tim-
bers produced from forests under unsustainable management, and computer chips cleansed with
certain substances that deplete the ozone layer (MEGJ, 2011). In addition, other standards such as
eco-labeling, packaging and recycling requirements are gaining importance in international trade
(WTO, 2011) and Japan has began setting the standards such as eco-mark early (JEAS, 2011). According
to the OECD (1997), the consumer awareness of eco-labels were relatively high (50%) in Japan com-
pared to other countries. On the other hand, international treaties such as Framework of Principles
for Integrating Economy and Environment in APEC, adopted by the APEC Environment Ministerial
Meeting in 1994 (APEC, 2011) require regional collaboration on trade and environmental issues.
 C. Atici / J. Japanese Int. Economies 26 (2012) 167–178 177

Therefore it can be asserted that Japan’s bilateral collaboration on trade and environment and strict
regulations help reducing export-led pollution level in the region.

7. Conclusions

Using the extended EKC and panel data, this study examines the interaction between trade liber-
alization and environment in ASEAN countries with special reference to trade flow with Japan. The re-
sults indicate that carbon emissions display an inverted S-shape in all groups. However, because some
of the developing group and the entire late-developing group are still at the beginning of the develop-
ment process and because income level has still not reached a desirable level, the emission levels are
expected to rise in the near future. The ratio of exports to GDP has a polluting effect, confirming the
export-based pollution, and the impact of polluting exports is observed particularly in the D4 group.
The results highlight the fact that, in order to prevent the region from becoming a pollution haven,
more strict regulations and cleaner technologies must be utilized in export-led sectors. FDI has an alle-
viating impact on the groups of developed countries, suggesting that FDI invests primarily in non-pol-
luting sectors in these countries. However, FDI may have country-specific pollution-increasing effects,
which requires further study. The study also finds that trade with Japan does not contribute to the pol-
lution level in the region; in fact, Japanese imports from the region are negatively correlated with per-
capita emissions. The reason for this effect may be Japan’s strict regulations that prevent pollution-
intensive industries from exporting to Japan, or Japan’s importing products from the polluting sectors
from countries outside the region. In any case, the results indicate that trade with Japan does not stim-
ulate the pollution level in the region.
Export-led growth is central to the economic progress and well-being of the region. However, it is
clear that, as exports rise, the carbon emissions will rise, at least in the near future. In order to prevent
the region from becoming a pollution haven in the future, more strict regulations should be imple-
mented. The sustainable policies can be designed such that environmentally friendly and efficient
technologies are used for production. In that process, regional collaboration and research and devel-
opment expenditures that utilize income earned from the export of goods and services are essential to
the improvement of environmental quality.

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