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Trade–finance complementarity and carbon emission intensity: panel evidence from middle-income countries

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Abstract

This paper examines the complementarity/substitutability of international trade and financial development in the mitigation of carbon emissions for a panel sample of 62 middle-income countries from 1991 to 2010. Applying the bias-corrected LSDV estimator, the paper yields interesting results. For the full sample, international trade and financial development play an interactive and complementary role in reducing CO2 intensity of energy use. That is, the environmental benefit of international trade is materialized only if a country has a well-developed financial market. Likewise, financial development is beneficial to the environment only in a highly open economy. Having stated these, the analysis also uncovers evidence that these results may be different across levels of income or across regions. The results bear important policy implications for the abatement of the environmental problem in the middle-income countries.

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Notes

  1. As commented by a referee, by controlling for the energy use, the coefficients of the explanatory variables capture their impacts on CO2 intensity of energy use. As an additional analysis, the referee suggests excluding the energy use from the list of explanatory variables. Our main concern is, if energy use is a relevant variable, its exclusion will result in biased estimates. Indeed, when we exclude the energy use from the results, the results turn perverse with no support for even the EKC as well as for the significance of the trade and finance variables. Viewing these to be due to omitted variable bias, we retain the energy use in the model.

  2. The standard error = \(\sqrt{{\text{var}} \left( {\theta_{1} } \right) + {\text{LTR}}^{2} {\text{var}} \left( {\theta_{3} } \right) + 2{\text{LTRcov}} \left( {\theta_{1} ,\theta_{3} } \right)}\).

  3. A right-hand-side variable is said to be endogenous when it is correlated with the error terms. In a dynamic panel model, this so-called endogeneity problem is inherent since, by construction, the lagged dependent variable is correlated with the individual-specific effect even if other right-hand-side variables are exogenous.

  4. Meschi and Vivarelli (2009) apply the bias-corrected LSDV estimator to a panel sample of 65 countries observed over 20 years to examine the relation between trade and inequality. Meanwhile, Huang (2010) assesses financial development implication of political institutions in a panel sample of 90 countries.

  5. To be exact, the mitigation of environment problem as suggested by the results is through improving CO2 efficiency or, equivalently stated, reduction in CO2 intensity of energy use. See also footnote 1.

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Acknowledgements

We would like to thanks the referees of the journal, who have provided very useful and constructive comments. The usual disclaimer, however, applies.

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Authors and Affiliations

  1. School of Graduate Studies, International Centre for Education in Islamic Finance (INCEIF), Lorong Universiti A, 59100, Kuala Lumpur, Malaysia

    Mansor H. Ibrahim

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Correspondence to Mansor H. Ibrahim.

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Ibrahim, M.H. Trade–finance complementarity and carbon emission intensity: panel evidence from middle-income countries. Environ Syst Decis 38, 489–500 (2018). https://doi.org/10.1007/s10669-018-9675-8

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