The effect of trade openness on CO2 emissions

Abstract

During the last decades, both trade and carbon dioxide (CO2) emissions have increased greatly. The plausible correlation between them is, therefore, an important question. The purpose of this thesis was to analyse the effect of trade openness on CO2 emissions. Using a panel data regression, 161 countries were compared over a ten year period. The model used for the regression was the fixed effects model. The effect of trade openness for different income levels was also examined and analysed. The results from the regression showed that trade openness had a positive effect on CO2 emissions, which is in line with some previous studies. It was also concluded that the effect differed between different income levels. For high-income countries, trade openness had a negative effect on CO2 emissions. For low-income countries, the effect was the opposite. The results were interpreted and compared to previous studies. Since the regression showed that trade openness had a negative effect for high-income countries and a positive effect for low-income countries, these results are in line with the Pollution Haven hypothesis. Evidence for the Environmental Kuznets Curve (EKC) was found by observing an inverted U-shape relationship between Gross Domestic Product (GDP) and CO2 emissions. As long as trade is an important part of the economy, greater efforts are needed globally to ensure that CO2 emissions from trade start to decrease.