Impact of Trade Openness and Energy Consumption on Environment Quality: Panel Data Analysis of Selected South Asian Countries

Abstract: Over the past few decades it has been identified that there is relationship between environmental quality (for example: sulfur dioxide SO2 and Carbon dioxide CO2 emissions) economic growth and energy consumption. This literature can be classified into three categories. All three categories show some relationship between different variables. This study shows that rise in economic growth has increased environmental pollution except for few high- income region. Most of the province has worse environmental condition.

Rationale of The Study: The first group analyzes the casual relationship between income growth and environment pollutants, referred to as the growth-environment nexus.(e.g., Grossman and Krueger 1991; Shafik 1994; Agras and Chapman 1999; Heil and Selden 1999; Friedl and Getzner 2003; Dinda and Coondoo 2006; Managi and Jena 2008).These studies have typically focused on Environment Kuznet Curve (EKC). The EKC hypothesizes an inverted U-shaped relationship between (per capita) income and pollution levels; that is, environmental quality first deteriorates and then improves with per capita income. This means that environmental degradation increases at initial level of sustainable development and starts to decline as economy achieves high level of economic development.

The second group analyzes the relationship between income growth and energy consumption, referred to as the growth-energy nexus(e.g., Kraft and Kraft 1978; Yu and Choi 1985; Glasure and Lee 1997; Soytaset al. 2001; Soytas and Sari 2003; 2006; Akinlo 2008). The central issue of this group is to search out whether economic growth stimulates energy consumption or not (Ozturk (2010).

Kraft and Kraft (1978) examine the causal linkages between energy consumption and economic growth in the United States; they find that the causal relationship runs from economic growth to energy, but the reverse does not hold.

Finally, third group turn its attention on the combination of first and second approaches  and shows the relationships among income growth, energy consumption and the environment, referred to as the growth-energy-environment nexus (e.g., Soytas et al. 2007; Zhang and Cheng 2009; Soytas and Sari 2009; Jalil and Mahmud 2009).

Economic theory believes that some of the gain and losses is associated with environmental effects of trade. Free trade has positive and negative effects on environmental condition. Free trade may be positive by introducing friendly techniques of production. It may be negative by shifting dirty industries from rich to poor countries. Also, there is positive relationship between Co2 and energy consumption.  We can divide trade openness measures into two categories. First, measures of trade volume and second, measures of trade restrictions. On the one hand, our estimation results for various measures of trade volumes indicate that there is a positive and significant association between trade openness and growth.  On the other hand, our estimation results for trade barriers contradict the conventional view on the growth effects of trade restrictions, which suggests an adverse association between trade barriers and growth.

Antweiler et al. (2001) examined effect of trade on environmental quality. They introduced composition, scale and technological effects by decomposing the trade model. The result of their study is that trade openness is beneficial for environment. This shows that increasing trade will improve the income level of developing nations which induce them to import less polluting techniques to enhance the production.

Copeland and Taylor (2005) supported that international trade is beneficial to environmental quality through environmental regulations and capital-labor channels. The authors documented that free trade declines CO2 emissions. The main reason is international trade will shift the production of pollution-intensive goods from developing countries to the developed nations and hence declines CO2 emissions of the world. Managi et al. (2008) found that quality of environment is improved if environmental regulation effect is stronger than capital labour effect.

Objectives:

  • Find out empirical relationship between the trade openness and environmental pollution of different countries.
  • Provide an understanding of energy consumption on environment.
  • Quantify the impact of economic growth on environment, especially in the context of Environment Kuznet Curve (EKC).
  • Proposed some policy actions for policy makers

Importance of this study: Pakistan achieved considerable level of economic growth over the last thirty years with some expectations as compared to the average growth rate of average GDP. Specifically growth rate of Pakistan is 5% as compared to average growth rate of the world that is 1.5%. However there are a few years in last decades when non structure events like flood, oil price shocks, and the situation of law and order condition effect the economy and lower the GDP growth. However this economic growth is not without cost. One of the biggest costs is the environment degradation due to the intensive use of energy in production process. We want to see that unlike Pakistan, the south Asian countries face the problem of growth with environmental degradation due to intensive use of energy in production process.

  • The importance of this topic is to looks at how economic activity and policy affect the environment in which we live. Some production generates pollution – for example, power station emissions can cause acid rain and also contribute to global warming. Household consumption decisions too affect the environment – for example, more consumption can mean more waste sent to polluting incinerators or garbage dumps.
  • There is a tradeoff between clean environment and economic costs. The central questions in environmental economics concern this tradeoff. So by focus on this study we can give reliable answers if these questions.

Review of Literature: Suri and Chapman (1998) discovered that degradation of environmental quality is due to high consumption of commercial energy. This article used the pooled cross countries and time series data of 33 countries starting from 1971 to 1990. This model gives an idea that environment stress depends upon per capita, structure changes and international trade. Study tries to measures that outcome of growth; structure changes and international trade have need of commercial energy. Result confirms the positive sign of per capita GDP and negative sign of square of per capita GDP. This implies that elasticity of energy falls as an increase in GDP and these results are related to previous results of CO2.

Findings of Muradian and Alier (2001) explain two different thoughts associate to environmental economics. One sight argues that free trade, economic growth and environmental policies have positive relationship. Literature supports that free trade promote the quality and encourage economic growth. Theyargue that low environmental standard have no effect on industrial mobility. On the other hand ecological economist criticizes the assumption of immobility of factor of production and positive relation among international trade, economic growth and environmental protection.

Song et al (2008) analyze Environment Kuznet Curve for 29 Chinese provinces over 1985 to 2008. The study use waste gas, waste water and solid waste as parameter of environment quality and GDP as parameter of economic growth. Using the OLS estimator results confirms that EKC for these three pollutants. Water pollution has reduced sooner than other pollutants. This advancement also illustrate that water pollution has obtain turning point prior to waste gas and solid waste. Thus china still needs to take steps to protect the environmental quality and to lower the peak of EKC.

Methods and Procedures:

The following carbon dioxide emission regression is:

LnCt = βo +β1Lnet + β2Lntrt + β3LnUrbn + ɛt

Here, Ct is Co2 emission per capita, et is energy consumption, tr is openness ratio, Urbn is the urbanization which may affect the environment and ɛt is error term.

Ct2 (per capita carbon dioxide emissions in metric tons), Et(kg of oil equitant per capita), PGDP, tr indicates trade openness (%of exports and imports values of total GDP) and Urbn indicates urbanization (%urban population of thetotal) can be downloaded by World bank Development Indicator.

Here βo, β1, β2 and β3represent the long-run elasticity of carbon dioxide emissions with respect to Et, tr and Urbn, respectively.

All variable will be taken in logarithmic form. We take time series data and many problems can arise from them. To get rid of this problem we can take difference or stationary.

Reference:

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Agras, J. and D. Chapman. 1999. “A Dynamic Approach to the Environmental Kuznets Curve Hypothesis.” Ecological Economics, 28(2). pp. 267-277.

Antweiler, W., Copeland, R. B., Taylor, M.S., 2001. Is free trade good for the emissions: 1950-2050? The Review of Economics and Statistics 80, 15-27.

Copeland, B. R., Taylor, M. S., 2005. Free trade and global warming: a trade theory view of the Kyoto Protocol. Journal of Environmental Economics and Management49, 205-234.

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The writer is a Business Administration Student (Finance) in University of Agriculture, Faisalabad, Pakistan.

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