The impact of disparities in market and non-market environmental policy instruments on intermediate and final trade

This paper examines how disparities in market-based and non-market-based environmental policy instruments affect gross exports and domestic value added in exports, distinguishing between intermediate and final goods and services at the industry level. We estimate a theory-based gravity model with country-industry-time fixed effects using Poisson Pseudo Maximum Likelihood for 32 countries, 56 industries and the period 2000–2014. The results show that the widening gap in market-based instruments between countries is associated with competitiveness losses for high-polluting industries – especially producers of intermediate goods – while low-polluting industries experience short-run gains in comparative advantage, with effects concentrated in the manufacturing sector and driven largely by OECD–non-OECD trade. By contrast, the effects of non-market-based regulatory gaps depend on the time period and the institutional quality of the destination country and are associated, in some cases, with export growth in low-polluting industries and with industrial technology upgrading.