Investigation of the causality between participation in global value chains and CO2 emissions between developed and developing countries

The production and consumption activities are cross-border and therefore, it is important to understand the role of Global Value Chains (GVCs) in fulfilling a country’s specific climate commitments. This study examines the causal relationship between selected GVC indices and CO2 emissions. We use the GVC position index, considered robust in comparison to the frequently used GVC participation index, for determining the impact on emissions. The forward and backward participation indices are considered in the analysis. The paper presents an analysis of 62 developing and developed economies from 1995 to –2018 using the Juodis A., Y. Karavias, and V. Sarafidis [2021. “A Homogeneous Approach to Testing for Granger non-Causality in Heterogeneous Panels.” Empirical Economics 60 (1): 93–112] approach, which is an improvement over the traditional approaches to analysing causality. The results show that the overall position in GVCs positively affects CO2 emissions for developing countries but a causal relationship does not exist for the developed countries. The developed countries attain a higher participation index but a lower position index. On the other hand, developing countries with fewer stringent environmental regulations may opt for an upstream position (more export-oriented) and by design specialize in more pollution-intensive industries. Noteworthy, production-based emissions in developed countries are reduced because of an increase in imports of emission-intensive products from developing countries.