Does environmental policy stringency reduce trade in energy resources? Insights from coal, petroleum, and gas

Abstract

Stringent Environmental policies are widely acknowledged as a significant policy option to control the harmful effects of environmental degradation. Restricting trade in energy commodities helps reduce the consumption of fossil fuels and thus improve environmental quality. Within the framework of new trade theory, the analysis intends to investigate the influence of environmental policy stringency on trade in conventional energy commodities (coal, petroleum, and gas) in the top polluted economies of the world from 1991 to 2021. Additionally, the study uses the asymmetry assumption compared to earlier research. For empirical investigation, the analysis applied the novel nonlinear CS-ARDL model that can deal with the issue of cross-sectional dependence and provide robust short and long-run estimates. Findings of the nonlinear model suggest that a positive shock in environmental policy stringency restricts trade in energy commodities in the long run, whereas a negative shock in environmental policy stringency does not exert any noticeable effect on these commodities. In the short run, a positive shock in environmental policy stringency exhibits significantly negative effects in mostly energy commodities. Energy demand and financial development promote trade in energy commodities in the nonlinear model, and the real exchange rate restricts trade in these commodities. Thus, policymakers should introduce strict environmental policies to limit the consumption of fossil fuels and promote clean and green energy sources and sustainable development.