Trade and environmental quality: a spatial econometric approach

This study examines the indirect effect of trade openness on quality of environment. The impact of trade openness on environmental quality is investigated through three channels that are scale, technique, and composition effect. Carbon dioxide emission is used as an indicator of quality of environment. The spatial econometric models i.e., Spatial autoregressive model, Spatial Autocorrelation Model, Spatial error model and Spatial Durbin Model are used to obtain empirical results and data from 2000 to 2021 for the whole world is used. Scale effect increases carbon dioxide emission. Environmental quality improves due to the technique effect. The composition effect is harmful to quality of environment. Trade effect and energy effect increases carbon dioxide emission. The spatial rho the spatial parameter is significantly positive which shows a positive effect of neighbouring countries' carbon dioxide emission on local country carbon dioxide emission. Then indirect effect of trade openness is analysed for developed and developing countries to see the difference in result. In developed countries, the scale effect positively impacts carbon dioxide emission. Technique effect and composition effect reduces carbon dioxide emission. In contrast, the scale effect and composition effect worsen the environmental quality, and the technique effect improves quality of environment in developing countries.