Trade-induced environmental quality: the role of factor endowment and environmental regulation in Africa

This paper investigates whether trade liberalization affects environmental quality (proxied by CO₂ emissions) and, if so, whether the trade-induced emissions originate from differences in countries’ economic growth, factor endowment or environmental regulations. We used panel data on 30 African countries and the Generalized Method of Moment estimation techniques. Though we found that trade openness is associated with elevated levels of CO₂ emissions due to comparative advantage originating from factor endowment (i.e. composition effect), the overall effects of trade are seen to have some beneficial effects on environmental quality. Also, relative economic growth lowers emissions (scale effect) perhaps due to technology transfer. Furthermore, the differences in environmental regulations do not directly affect CO₂ emissions while past levels of CO₂ emissions significantly increase the current level due to the cumulative effect of CO₂ emissions. To achieve a significant reduction in emissions, environmental regulations must be enforced in tandem with growth enhancing and production technology choice policies.