Trade Openness and Co2 Emissions in Tunisia

Abstract

By reallocating resources among more or less polluting sectors, trade reforms affect pollution levels directly. They also affect pollution indirectly through their impact on economic activity and income levels, which then affect not only emissions, but also the demand for higher environmental standards. The sign of the direct and indirect effects is ambiguous. In other words, whether trade openness leads to more or less pollution is an empirical question. Using cointegration techniques, we disentangle the long- and short-run relationship between trade openness, income per capita and CO2 emissions in Tunisia, as well as the extent of Granger causality among these variables. Results suggest that the direct effect of trade openness on CO2 emissions is positive both in the short and the long run, but the indirect effect is negative at least in the long run. The overall effect is positive both in the short and long run, highlighting the importance for trade reforms to be accompanied by strong environmental policies.