International trade of environmental goods in gravity models

Abstract

Environmental goods are goods used or produced by industry that reduce air and water pollution and optimize the use of resources in production. Despite several Sustainable Development Goals explicitly calling for resilient and sustainable development, the diffusion of such goods is still low, especially in developing countries. Only sporadic research on the determinants of international trade of environmental goods is available. Based on the OECD classification of environmental goods, this gap is filled by adopting a gravity model, using trade data over a time span of 15 years from 1999 to 2014 across 71 countries. The central message of this paper is that environmental regulatory stringency is a key determinant of environmental goods trade. It is specifically provided evidence that a substitution effect exists between environmental regulation stringency and trade of environmental goods. In line with empirical literature on traditional gravity models, increased capacity to innovate, cultural ties, geographical proximity and financial uncertainty also play a role.