The impact of trade in environmental goods on pollution: what are we learning from the transition economies’ experience?

We investigate the causal effects of trade intensity in environmental goods (EGs) on air and water pollution by treating trade, environmental policy, and income as endogenous. We estimate a system of reduced-form, simultaneous equations on extensive data, from 1995 to 2003, for transition economies that include Central and Eastern Europe and the Commonwealth of Independent States. Our empirical results suggest that, although trade intensity in EGs (pooled list) reduces CO2 emissions mainly through an indirect income effect, it increases water pollution because the income-induced effect does not offset the direct harmful scale-composition effect. No significant effect is found for SO2 emissions with respect to the list of aggregated EGs. In addition to diverging effects across pollutants, we show that results are sensitive to EGs' classification, e.g., cleaner technologies and products, end-of-pipe products, environmentally preferable products, etc. For instance, a double profit—environmental and economic—is found only for "cleaner technologies and products" in the models explaining emissions of greenhouse gases. Interesting findings are discussed for imports and exports of various classifications of EGs. Overall, we cannot support global and uniform trade liberalisation for EGs from a sustainable development perspective. Either regional or bilateral trade agreements that take into account the states' priorities could act as building blocks towards a global, sequentially achieved liberalisation of EGs.