1. Structural Change and the Environment: An Application to the WIOD Database Deliverable 7.2 by Andreas Löschel, Sascha Rexhäuser and Michael Schymura WIOD Consortium Meeting, Seville, 25th – 28th June 2011 5 Structural Change and the Environment

2. 1 2 3 Content Introduction Data and Econometric Model Endogenity Problems Results 5 Instruments 4 Structural Change and the Environment 6 6 Results Conclusions and Drawbacks 2

3. 1 Introduction Research Questions: Is Free Trade Good or Bad for the Environment? Which factors are affected by trade? Direct or indirect impacts? Methodology: Structural Decomposition Analysis (SDA) Panel Econometrics Approach based on the seminal contribution by Antweiler, Copeland and Taylor (2001, A.E.R.) Structural Change and the Environment 3

4. 2 Data and Econometric Model Used data from WIOD: Information about Gross Output, Share of high-skilled workers Environmental Satellite Accounts Trade Data Other data sources: Income, Population, Investments (PWT 6.3) Depreciation, TFP growth, Capital Stocks (EPWT 3.0) Geographical informations such as distance, area etc. (CIA) Data on patents (several sources) Structural Change and the Environment 4

5. 5 12Data and Econometric Model Structural Change and the Environment Econometeric Implementation: POLLUTION = Scale + Composition + Technique see Antweiler, Copeland, and Taylor (2001, A.E.R) 5

6. 3 Endogenity Problems Problems: Trade (TO) is endogenous Income (INC) is endogenous too Regulation (Helsinki)? Reasons for Endogenity (among others): Measurement Errors Omitted Variables Problem Simultaneity TO, INC, HELSINKI Structural Change and the Environment 12 6

7. 12 4 Instruments Instrument Trade Openess (1/2): Taken from the trade literature, Gravity-Model (see Frankel und Romer (1999, A.E.R.)) e.g. bilateral distance, common border, etc.: - strong correlation with actual trade openess - not correlated with SO2-Emissions or the error term 2SLS Stage 1: Structural Change and the Environment 3 7

8. 12 4 Instruments Instrument für Trade Openess (2/2): Actual vs. Constructed trade share Structural Change and the Environment 3 8

9. 12 4 Instruments Instrument for Per Capita Income (1/2): Taken from the growth literature: (see Mankiw, Romer und Weil (1992, Q.J.E.) and Frankel and Rose (2005, R.E.S.)) Conditional Convergence Hypothesis: - Lagged income - Investments and Depreciation - Population growth, Growth of labor productivity - additionaly from WIOD: share of high-skilled workers (HK) 2SLS Stage 1: Structural Change and the Environment 3 9

10. 12 4 Instruments Instrument for Per Capita Income (2/2): Actual vs. Constructed income per capita: Structural Change and the Environment 3 10

11. 12 5 Results (Endogenous) Structural Change and the Environment 3 4 11

12. 12 5 Results (Instruments) Structural Change and the Environment 3 4 IV vs. 2SLS 12

13. 12 6 Conclusions Structural Change and the Environment 3 45 Conclusions and drawbacks: Currently it is hard to conclude whether free trade is good or bad for the environment. But: postive trade induced composition effects (in this case positive is bad) Final report will include as many as possible WIOD data with respect to the environmental satellites, the trade data, output data, labor files and especially country coverage Problem: Physical capital stock data is hardly available for the time and country period covered by WIOD. One possible solution: Perpetual Inventory Mehtod (Caselli (2005)). Problem: Endogenity of Regulation 13

14. 14 3 Literature Antweiler, Werner, Brian R. Copeland und M. Scott Taylor (2001): Is Free Trade Good for the Environment?, in: American Economic Review, Vol. 91, No. 4, S. 877-908. Caselli, Francesoco (2005): Accounting for Cross-Country Income Differences, in: Handbook of Economic Growth, Vol. 1, No. 1, Chapter 9, S. 679-741 Frankel, Jeffrey A. und David Romer (1999): Does Trade Cause Growth?, in: American Economic Review, Vol. 89, No. 3, S. 379- 399. Frankel, Jeffrey A. und Andrew Rose (2005): Is Trade Good or Bad for the Environment?: Review of Economics and Statistics, Vol. 87, No. 1, S.85-91 Structural Change and the Environment 14

15. 15 3 Managi, Shunsuke, Akira Hibiki und Tetsuya Tsurumi (2009): Does Trade Openess Improve Environmental Quality, in: Journal of Environmental Economics and Management, Vol. 58, No. 3, S. 346-363. Mankiw, N. Gregory, David Romer und David N. Weil (1992): A Contribution to the Empirics of Economic Growth, in: Quarterly Journal of Economics, Vol. 107, No. 2, S. 407-437. Staiger, Douglas und James H. Stock (1997): Instrumental Variable Regression with Weak Instruments, in: Econometrica, Vol. 65, No. 3, S. 577-586. Structural Change and the Environment 15

16. 16 3 Thank you for your attention! Structural Change and the Environment 16