The quest for sustainability and greener economies has intensified the call for more stringent environmental regulation, hence environmental efficiency of production processes that produce growth. Since trade activities represent a huge part of economic growth, while countries are becoming increasingly cautious of their imports, environmental efficiency becomes an integral consideration for trade. This study investigates the link between environmental efficiency and export performance among the top 20 countries on the environmental performance scale utilizing annual data between 1980 and 2019. The classic comparative advantage theory of international trade provides the theoretical basis for the study. Environmental efficiency scores were generated using the slack-based data envelopment analysis while the nature of causality between environmental efficiency and export performance is established using the Pairwise Dumitrescu Hurlin Panel Causality Tests and VECM Granger causality approaches. The export models are estimated using the fully modified and dynamic ordinary least squares approaches.
Bidirectional causality is found between export per capita (and export intensity) and environmental efficiency for the panel analysis. Causality results is however mixed at country level with significant unidirectional causal links running from either export to environmental efficiency or otherwise. The FMOLS and DOLS analysis provides evidence of significant positive effect of environmental efficiency on export per capita and export intensity for the panel of the top EPI countries, and confirmed in most of the countries. The study therefore provides strong evidence for the role of environmental efficiency in countries’ efforts to improve their global competitiveness in trade-related activities. Thus, the study emphasizes increased global investment in environmental efficiency as the global economies grow.
JEL: F18; Q56; Q58; N40