The role of trading environment-friendly goods in environmental sustainability: Does green openness matter for OECD countries?

Abstract

Achieving carbon neutrality targets is a major challenge for Organization for Economic Co-operation and Development (OECD) countries that experience mounting ecological degradation over the last few decades. To deal with this situation, the trading of green products may play a crucial role. However, previous studies have not captured the net impact of green trading, and also the international trade basket used in these studies is proxied by the trade openness index including both environment-friendly and not-so-friendly goods. To provide a solution, this research intends to capture the net effects of green goods on the environment over the period 2003 to 2016 in 35 OECD countries. This study extends the literature by computing a new Green Openness Index based on the OECD Combined List of Environmental Goods (CLEG) basket that consists of 255 products. After this, an empirical model based on the Environmental Kuznets Curve (EKC) hypothesis is developed to test the role of the Green Openness Index in environmental sustainability using methodology robust against heterogeneity and cross-sectional dependence. The outcomes unfolded the validity of the EKC hypothesis in 35 OECD countries. Empirical estimates confirmed that the Green Openness Index, which considers traditional environment-friendly goods as well as environmentally preferable goods, stimulates environmental sustainability. Finally, numerous policies are directed to accomplish carbon neutrality targets.