Different Effect of Inward Foreign Direct Investment, Outward Foreign Direct Investment, Imports, and Exports on Greenhouse Gas Emission across 24 European Union Countries

Abstract

The European Union (EU) has achieved remarkable progress in reducing greenhouse gas emission with the help of the emission trade system (ETS) and other environmental policies for the past decades. The main purpose of current study is to empirically investigate different effects of inward foreign direct investment, outward foreign direct investment (FDI), imports and exports on greenhouse gas (GHG) emissions for different level of GDP per capita. Panel data set of 24 European Union countries was selected from 2013 to 2017. And these 24 countries would be further divided into two groups based on their GDP per capita. The result indicates that inward FDI would decrease GHG emission for high GDP per capita group, whereas it increases the GHG emission for low GDP per capita group, suggesting the existence of “pollution haven” in countries with lower GDP per capita. On the contrary, the effect of outward FDI on GHG emission would be positive for high GDP per capita group but negative for low GDP per capita group. Meanwhile, exports would increase GHG emission for low GDP per capita group but decrease GHG emission for high GDP per capita group. Besides, imports would also be a contributor of GHG emission for high GDP per capita group. The conclusion drawn from this study implicates that, to reduce the domestic GHG emissions, countries with different level of GDP per capita should have different strategies. For countries with high level of GDP per capita, it would be more effective to attract inward FDI while for countries with low level of GDP per capita, promoting environmental policies with subsidies to encourage domestic producer to adopt newer and cleaner technology would be primary.