Structural Change and the Environment: An Application to the WIOD Database

Deliverable 7.2by Andreas Löschel, Sascha Rexhäuser and Michael Schymura

WIOD Consortium Meeting, Seville, 25th – 28th June 20115

Structural Change and the Environment

1

2

3

Content

Introduction

Data and Econometric Model

Endogenity Problems

Results

5

Instruments4

Structural Change and the Environment

66

Results

Conclusions and Drawbacks

2

1 Introduction

Research Questions:

Is Free Trade Good or Bad for the Environment?

Which factors are affected by trade?

Direct or indirect impacts?

Methodology:

Structural Decomposition Analysis (SDA)

Panel Econometrics

Approach based on the seminal contribution by Antweiler, Copeland and Taylor (2001, A.E.R.)

Structural Change and the Environment

3

2 Data and Econometric Model

Used data from WIOD:

Information about Gross Output, Share of high-skilled workers

Environmental Satellite Accounts

Trade Data

Other data sources:

Income, Population, Investments (PWT 6.3)

Depreciation, TFP growth, Capital Stocks (EPWT 3.0)

Geographical informations such as distance, area etc. (CIA)

Data on patents (several sources)

Structural Change and the Environment

4

5

1 2 Data and Econometric Model

Structural Change and the Environment

Econometeric Implementation:

∆ POLLUTION = Scale + Composition + Technique

2it 0 1 it 2 it 3 it 0 it it

21 it it 2 it it

23 it it 4 it it

5 it it it

1 it 2 it it

SO2 _Emissionen INC INC KL TO

TO REL.KL TO REL.KL

TO REL.INC TO REL.INC

TO REL.KL REL.INC

HELSINKI OSLO

see Antweiler, Copeland, and Taylor (2001, A.E.R)5

3 Endogenity Problems

Problems:

Trade (TO) is endogenous

Income (INC) is endogenous too

Regulation (Helsinki)?

Reasons for Endogenity (among others):

Measurement Errors

Omitted Variables Problem

Simultaneity TO, INC, HELSINKI

Structural Change and the Environment

1 2

6

1 2 4 Instruments

Instrument Trade Openess (1/2):

Taken from the trade literature, Gravity-Model(see Frankel und Romer (1999, A.E.R.))

e.g. bilateral distance, common border, etc.: - strong correlation with actual trade openess - not correlated with SO2-Emissions or the error term

2SLS Stage 1:

Structural Change and the Environment

3

ijt 0 1 ijt 2 it 3 jt

4 it jt 5 it jt 6 7

8 ijt it jt ijt

ln(TO ) ln(Dis tance ) ln(ActPop ) ln(ActPop )

ln(Area Area ) (LL LL ) CB CC

CB (LL LL )

7

1 2 4 Instruments

Instrument für Trade Openess (2/2):

Actual vs. Constructed trade share

Structural Change and the Environment

3

8

1 2 4 Instruments

Instrument for Per Capita Income (1/2):

Taken from the growth literature:(see Mankiw, Romer und Weil (1992, Q.J.E.) and Frankel and Rose (2005, R.E.S.))

Conditional Convergence Hypothesis: - Lagged income - Investments and Depreciation - Population growth, Growth of labor productivity - additionaly from WIOD: share of high-skilled workers (HK)

2SLS Stage 1:

Structural Change and the Environment

3

0 1 2 3 it itititit it 1

GDP GDP Iln ln ln ln n g HK

Pop Pop GDP

9

1 2 4 Instruments

Instrument for Per Capita Income (2/2):

Actual vs. Constructed income per capita:

Structural Change and the Environment

3

10

1 2 5 Results (Endogenous)

Structural Change and the Environment

3 4

11

1 2 5 Results (Instruments)

Structural Change and the Environment

3 4

IV vs. 2SLS

12

1 2 6 Conclusions

Structural Change and the Environment

3 4 5

Conclusions and drawbacks:

Currently it is hard to conclude whether free trade is good or bad for the environment. But: postive trade induced composition effects (in this case positive is bad)

Final report will include as many as possible WIOD data with respect to the environmental satellites, the trade data, output data, labor files and especially country coverage

Problem: Physical capital stock data is hardly available for the time and country period covered by WIOD. One possible solution: Perpetual Inventory Mehtod (Caselli (2005)).

Problem: Endogenity of Regulation

13

14

3Literature

Antweiler, Werner, Brian R. Copeland und M. Scott Taylor (2001): Is Free Trade Good for the Environment?, in: American Economic Review, Vol. 91, No. 4, S. 877-908.

Caselli, Francesoco (2005): Accounting for Cross-Country Income Differences, in: Handbook of Economic Growth, Vol. 1, No. 1, Chapter 9, S. 679-741

Frankel, Jeffrey A. und David Romer (1999): Does Trade Cause Growth?, in: American Economic Review, Vol. 89, No. 3, S. 379-399.

Frankel, Jeffrey A. und Andrew Rose (2005): Is Trade Good or Bad for the Environment?: Review of Economics and Statistics, Vol. 87, No. 1, S.85-91

Structural Change and the Environment

14

15

3

Managi, Shunsuke, Akira Hibiki und Tetsuya Tsurumi (2009): Does Trade Openess Improve Environmental Quality, in: Journal of Environmental Economics and Management, Vol. 58, No. 3, S. 346-363.

Mankiw, N. Gregory, David Romer und David N. Weil (1992): A Contribution to the Empirics of Economic Growth, in: Quarterly Journal of Economics, Vol. 107, No. 2, S. 407-437.

Staiger, Douglas und James H. Stock (1997): Instrumental Variable Regression with Weak Instruments, in: Econometrica, Vol. 65, No. 3, S. 577-586.

Structural Change and the Environment

15

16

3

Thank you for your attention!

Structural Change and the Environment

16