Economic integration and CO2 emissions: evidence from emerging economies

Abstract

The study investigates the influences of FDI inflows and trade openness on CO2 emissions by using a theoretical framework composed by the STIRPAT model and the EKC hypothesis for 33 emerging economies over the period 1996-2014. Our empirical results show interesting findings. Firstly, there is strong evidence on the existence of the EKC hypothesis for emerging economies. Secondly, FDI inflows significantly contribute to the CO2 emissions in the short and long term confirming the pollution haven hypothesis according to which foreign investment is made in polluting industries. Trade openness has a positive impact on CO2 emissions, especially in the short run; however, this variable has a negative impact on the CO2 emissions in the long run. These observations have also been discussed by components of CO2 emissions, and they suggest policy-makers to develop an environmentally friendly strategy by adopting a strategy promoting conjointly trade openness and FDI inflows in flexible sectors that can easily integrate the international environmental standards rather FDIs invested in manufacturing producing sectors - according to our study, such long-term strategy appears to be the best choice for an emerging country to benefit from a 'pollution-halo' (i.e. FDI inflows contribute to reducing the CO2 emissions).