Environmental Goods Trade and Environmental Sustainability: Exploration of the Effect of Greenhouse Emissions in Europe

Abstract

This study examines the influence of trade in environmental goods on environmental sustainability, with a particular emphasis on the impact of greenhouse gas emissions in Europe. Utilising annual data from 59 European countries over the period 1994–2024, the research incorporates environmental sustainability indicators sourced from the World Development Indicators (WDI, 2022) and trade data from the International Monetary Fund (IMF, 2024). The analysis employs second-generation econometric techniques to address cross-sectional dependence and heterogeneity, including Pesaran’s (2004, 2015) tests, Westerlund’s (2007) cointegration approach, and the Augmented Anderson-Hsiao (AAH) estimator as proposed by Chudik and Pesaran (2022). Empirical findings indicate a significant long-term cointegration between trade in environmental goods and greenhouse gas emissions. Specifically, exports of environmental goods and total trade in these goods contribute to the reduction of emissions, whereas energy consumption continues to be a primary driver of environmental degradation. Additionally, the import of environmental goods shows a weak but negative relationship with greenhouse emissions, suggesting that imported environmental technologies may enhance production efficiency. The study further concludes that trade in environmental goods is pivotal in achieving environmental sustainability across European economies by fostering cleaner production and innovation-driven growth. Consequently, policies that promote the expansion of green trade, reduce trade barriers on environmental goods, and encourage the use of renewable energy are essential to bolstering Europe’s environmental resilience. Moreover, advancing research and development in clean technologies, harmonising regional carbon standards, and incentivizing sustainable production practices will facilitate Europe’s transition toward a low-carbon economy.