Does trade openness mitigate environmental degradation in Organisation for Economic Co-operation and Development (OECD) countries? Implications for achieving sustainable development

Abstract

The link between trade openness and CO2 emissions is a key research focus in times of pressing global sustainability needs and ongoing climate change discussions. In this study, we address the critical issue of the impact of trade openness on CO2 emissions in 20 OECD countries over a 150-year period using historical datasets. We investigate how trade openness affects environmental sustainability within this group of nations. To overcome the challenges related to heterogeneity and cross-sectional dependence, we applied robust cointegration techniques. Our analysis reveals direct and indirect impacts of trade openness on CO2 emissions. The direct effect demonstrated a positive correlation between trade openness and CO2 emissions, whereas the indirect effect, mediated by income growth, exerted a counteractive negative influence on this relationship. These divergent effects support the environmental Kuznets curve hypothesis. Our findings suggest that as income levels rise, the indirect effect gradually outweighs the direct effect, leading to a significant reduction in long-term CO2 emissions in OECD countries.