Trade Openness and CO2 Emissions in Tunisia

The literature on trade often focuses on its impact on economic growth. However, more recently attention has been paid to the impact of openness on other important aspects of individual welfare, such as the environment. Because openness affects economic activity it will also affect pollution levels. But changes in economic activity also imply changes in the levels of income per capita which may lead to changes in the demand for environmental standards. Moreover, trade will affect pollution levels directly through its impact on the composition of the production bundle, as resources get reallocated across more, or less polluting sectors. All this suggests that the impact of trade openness on pollution is likely to depend on initial conditions and therefore cross-country results are likely to hide significant heterogeneity which may lead to the wrong policy conclusions. The objective of this paper is to assess the impact of Tunisia’s trade reforms over the last four decades on its CO2 emissions by taking into account not only the direct effect of trade on emissions, but also its indirect effect through growth. Using cointegration techniques we disentangle the long and short-run relationship between trade openness, income per capita and CO2 emissions in Tunisia, and explore the extent of Granger causality among these variables. Results suggest that the direct effect of trade openness on CO2 emissions is positive both in the short and the long run, but the indirect effect is negative at least in the long run.