Environmental impact of services trade: New evidence from african countries

Abstract

In trade-environment literature, increasing concern has been more focused on the goods trade and environment nexus with less focus on services. To this end, within the context of the Environmental Kuznets Curve (EKC) hypothesis, this study explores different channels through which services trade affects environmental pollution (CO2). The study decomposed the effect of trade into the scale, technique, and composition effects in a panel of 47 African countries. Finding from the dynamic GMM estimate revealed that the scale effect increases CO2 emissions and degrades the environment. The technique effectively reduces CO2 emissions which is only temporary as there is evidence of N-shaped nexus between GDP and CO2 emissions. Moreover, trade statistically and significantly increases CO2 emissions and there is no evidence of a turning point in the trade and CO2 emissions nexus. Energy and composition effects were found to increase emissions. Furthermore, the result indicates the existence of the pollution haven hypothesis (PHH) and there is no robust evidence supporting the factor abundance effect. There is also evidence of the harmful mediation effect of trade through energy intensity as it increases CO2 emissions. In line with the study findings, policy recommendations were made to mitigate the harmful environmental effect of growth and services trade in African countries.