Journal of Environmental Economics and Management (2003), 46, 3, pp. 363-83

Determining the Trade-Environment Composition Effect:

The Role of Capital, Labor and Environmental Regulations

Matthew A. Cole and Robert J.R. Elliott

Department of Economics, University of Birmingham

Abstract

This paper argues that pollution intensive sectors may be subject to opposing forces of comparative advantage since these sectors are also typically capital intensive, yet regions with low environmental regulations tend to be those that are the least capital abundant. We examine therefore, whether compositional changes in pollution arising from trade liberalization originate due to differences in capital-labor endowments and/or differences in environmental regulations. The contribution of the paper is threefold; first, we provide a comprehensive empirical analysis of the determinants of four common pollutants, paying particular attention to the nature of the trade-induced composition effect; second, we investigate whether the result of Antweiler et al. (2001), who find evidence that both environmental regulations and capital-labor endowments determine sulfur dioxide concentrations, also holds for sulfur dioxide emissions; third, we examine whether this result holds for altogether different pollutants. Our results, while providing partial support for Antweiler et al., also raise a number of points for discussion.

Key words: Trade, pollution, composition effect, environmental regulations, factor endowments