IEA-Specific Linear Relative Environmental Stringency

By construction, the linear differential implies a constant effect across all IEAs considered, regardless of their type. As noted earlier, a measure which combines the entire spectrum of IEAs (i.e., climate change, acid rain, and ozone depletion) may be regarded as not rigorous enough. Following Slechten and Verardi (2014), three differential measures will be considered based on the three IEA categories (climate change, acid rain, and ozone depletion) outlined in section 3.3. The logic behind this bundling is simple and postulates that trade effects are more likely to be homogenous

for IEAs belonging to the same category. The specification thus obtained is shown

in (3.7). Herek denotes the IEA type; namely climate change (CC), acid rain (AR),

and ozone depletion (OD). For this additional specification, the previous discussions apply. lnTx,m,s,t = X k∈{CC, AR,OD} β₁00_,kdIEAk_x,m,t+ X k∈{CC, AR,OD} β₂00_,kdIEAk_x,m,t×Ds +γ00T Ax,m,t+µ00x,m,s,t (3.7) µ00_x,m,s,t =ν_x,m,t00 +ν_x,m,s00 +ν_s,t00 ν_x,m,t00 =ν_m,x,t00 (3.8) Results

The results obtained after separating IEAs by their scope into climate change, acid rain, and ozone depletion are presented in table 3.15. The estimates are in line with those discussed earlier. Most importantly, the effects of climate change and acid rain IEAs on pollution-intensive exports are negative, and statistically significant for all pollutants considered. Furthermore, only the ratification of acid rain IEAs seems to adversely affect exports of less pollution-intensive sectors. This dynamic is, most likely, driven by the transmission of negative shocks from "dirty" sectors towards

their "clean" peers, perhaps through intermediate inputs or transportation linkages68_.

Given the implied overall reduction in outflows, the adoption of acid rain IEAs is characterized by a negative export scale effect. Conversely, "clean" sectors seem to benefit from the ratification of climate change agreements, namely the Kyoto proto-

col69. This dynamic is in line with the discussions and results presented in sections

3.2, 3.5.1, and 3.5.2; according to which ratification of IEAs engenders a compositional shift towards a "greener" bundle of exports. Let’s now turn to column (3) of table 3.15 for a numerical perspective on this last viewpoint. For exports of other non-metallic minerals (the most CO2-intensive industry in the sample), the estimates in column (3) imply a Kyoto ratification effect of -3%. Meanwhile, outflows of transport equip- ment (the average CO2-intensive industry) would experience a 2% increase. Lastly, if the exporter ratifies the Kyoto protocol, exports of leather and footwear (the least CO2-intensive industry) are estimated to increase by approximately 5%. Moreover,

for coke, refined petroleum, and nuclear fuel sector (the most SOx-intensive industry

in the sample)70 _{the ratification of an additional acid rain IEA implies a 3.2% decline}

in outflows. At the opposite end, the marginal ratification effect of an acid rain IEA,

model fail to account for the time-varying nature of trade determinants.

68_{For example, a regulatory shock that results into higher production costs in the coke, refined} petroleum, and nuclear fuel industry may spill over into industries such as leather and footwear, or textiles and textile products through higher energy prices.

69_{The next chapter reassesses this result by taking into account the binding emission caps adopted} by some Kyoto ratifiers.

70_{Recall that SO}

xstands for sulfur oxides and it is by far the most targeted chemical compound

entails a meager 0.02% increase in exports of leather and footwear (the least SOx- intensive industry in the sample). A version of this weak compositional effect was also

observed in the previous sections, when the aggregate stock of IEAs was utilized71.

The ratification of ozone depletion agreements, however, does not seem to affect "dirty" industries at all. In fact, these opposite is observed. This finding, although counterintuitive, is driven by one important detail. That is, sectors where the use of ozone depletion substances is high display moderate emission intensities in all

eight pollutants considered72_{. It is also worth reminding the reader that none of}

the eight pollutants included is targeted directly by the Montreal protocol and its subsequent amendments. In order to circumvent this problem, I turn to the inclusion of agreement-specific measures of pollution intensity. The results obtained this way are shown in table 3.16. The first column includes the first principal components

as IEA-specific measures of sectoral "dirtiness"73_{. No data is available on emissions}

of ozone depletion substances (i.e., CFC or HCFC). As a consequence, no principal component-based measure of "dirtiness" is obtainable for this kind of IEAs. A binary measure, specific to ozone depletion IEAs, will be used instead. This was introduced and discussed within section 3.4.2. The estimates recovered this way are clear and in line with previous findings. It is important to note that now, as expected, the coefficient attached to the interaction term involving the ozone depletion differential

(β₂00_,OD) is negative and statistically significant. With the exception of climate change

IEAs, which seem to positively affect outflows from "clean" sectors, all coefficients indicate a negative effect of IEAs on exports; regardless of whether the sector is "dirty" or "clean", or more or less polluting.

I now shift the focus to the second column of table 3.16. Here, two binary mea- sures of sectoral pollution intensity are introduced to facilitate the interpretation of ratification effects. These are specific to climate change (CC) and acid rain (AR) IEAs. Both measures are based on the underlying distributions of the PC1 CC and PC1 AR principal components. Sectors with principal component values above the

75th _{percentile are categorized as "dirty" whereas the rest are marked as "clean".}74

First and foremost, the coefficients attached to the interaction terms β₂00_,CC, β₂00_,AR,

under the acid rain IEA category.

71_{Unfortunately, the present analysis does not benefit from emission data for ozone depletion} substances. It is, therefore, unable to make any inferences on the potential compositional shifts brought about by the ratification of ozone depletion IEAs when using a continuous measure of sectoral "dirtiness".

72_{These sectors are i.e., transport equipment, electrical and optical equipment, machinery, n.e.c.,} textile and textile products, and leather and footwear. This sectoral trait can also be observed in table 3.10.

73_{The first principal component of emission intensities from carbon dioxide (CO}

2), methane (CH4), and nitrogen oxides (NOx), PC1 CC, is used as a measure of pollution intensity that is

specific to climate change IEAs. The first principal component of emission intensities from sulphur oxides (SOx), nitrogen oxides (NOx), nitrous oxide (N2O), non-methane volatile organic compounds (NMVOC), and ammonia (NH3), PC1 AR, is used as a relevant pollution intensity measure for acid

and β₂00_,OD are negative and statistically significant, once again highlighting the dele-

terious effect of IEA ratification on sectors categorized as "dirty". Quantitatively, the ratification of the Kyoto protocol on the exporter side is equivalent to a 0.8% decline in "dirty" exports. Conversely, outflows from sectors tagged as "clean" are expected to increase, in the wake of the Kyoto adoption, by 5.8%. Once more, these results underline the readjustment of the export bundle towards a higher "clean"/"dirty" out- flows ratio. Conversely, acid rain IEAs seem to hamper exports regardless of their origin sector. Specifically, the ratification effect of an additional acid rain IEA by the exporter decreases "clean" outflows by about 1%. Similarly, exports from sectors cat- egorized as "dirty" decline by approximately 5%. Ozone depletion IEAs carry an even stronger effect but this result is expected. Recall that the Montreal protocol and its

subsequent agreements include strict provisions regarding the banning of (i)exports

of substances targeted, (ii) exports of products incorporating these substances, and

(iii)exports of goods manufactured with but not containing, the targeted substances.

Numerically, outflows from sectors identified as "clean" decline by 2.2% due to the ratification of an additional ozone depletion IEA by the exporter. The decline in "dirty" exports is even larger, situating at about 7.5%. The ratification of any kind of IEA (i.e., climate change, acid rain, and ozone depletion) by the exporter seems to entail a negative effect on outflows from sectors categorized as "dirty". Moreover, acid rain and ozone depletion IEAs appear to have a detrimental effect on exports originating in "clean" industries as well. This evidence underlines the negative scale effects brought about by the adoption of IEAs in these two categories. The effects are considerably larger for ozone depletion IEAs. Conversely, the adoption of Kyoto protocol seems to benefit exporters in "clean" sectors, where outflows are found to increase by as much as 5.8% following the ratification. This result showcases, once more, the compositional shift towards a more "cleaner" export bundle for parties to the Kyoto protocol.

3.5.4 Environmental Stringency by Exporter and Importer