This paper sets out a theory of how openness to trading opportunities affects pollution concentrations. We started with a theoretical specification that gave pride of place to scale, technique and composition effects and then showed how this theoretical decomposition is useful in thinking about the relationship between openness to international markets and the environment. In our empirical section we adopted a specification directly linked to our earlier theory more.
We then estimated this specification paying special attention to the potentially confounding influences introduced by the panel structure of our data set. Our results consistently indicate that scale, technique and composition effects are not just theoretical constructs with no empirical counterparts. Rather these theoretical constructs can be identified and their magnitude measured. Moreover, once measured they can play a useful role in determining the likely environmental consequences of technological progress, capital accumulation or increased trade. These estimates may also be useful in aggregate CGE modeling of the effects of various free trade agreements and other trade reforms [see for example, Ferrantino et al.,1996].
Overall the results indicate that increases in a country’s exposure to international markets creates small but measurable changes in pollution concentrations by altering the pollution intensity of national output. While our estimates indicate that greater trade intensity creates only relatively small changes in pollution via the composition effect, economic theory and numerous empirical studies demonstrate that trade also raises the value of national output and income.
These associated increases in output and incomes will then impact on pollution concentrations via our estimated scale and technique effects. Our estimates of the scale and technique elasticities indicate that if openness to international markets raises both output and income by 1%, pollution concentrations fall by approximately 1%. Putting this calculation together with our earlier evidence on composition effects yields a somewhat surprising conclusion: freer trade is good for the environment.