Fostering Environment Efficiency through Transnational Linkages? Trajectories of CO 2 and SO 2 , 1980–2000

Recent optimism about sustainability has centred on the opportunities for improvements in environment efficiency through the international diffusion of environmentally beneficial innovations. This paper investigates two claims about the conditions under which countries are most likely to realise these gains. First, ‘dirtier’ economies should improve their environment efficiency faster as they adopt environmentally sound technologies and policies similar to those in ‘cleaner’ countries, resulting in catch-up and convergence over time. Second, transnational linkages accelerate the international spread of environmentally beneficial innovations and, therefore, improvements in environment efficiency. To test these claims, we use econometric techniques to examine the dynamics and determinants of two pollutants—CO 2 and SO 2 —using a panel comprising up to 114 countries over the period 1980–2000. Our empirical findings broadly support both claims. Applying tests of unconditional convergence, we find robust evidence for convergence in levels of CO 2 and SO 2 efficiency, indicating catch-up by less pollution-efficient economies over time. Similarly, confirming claims about transnational linkages, we find that imports from more pollution-efficient countries and telecommunications connectivity are associated with faster improvements in domestic CO 2 and SO 2 efficiency. Results also suggest that inward foreign direct investment is positively associated with CO 2 efficiency. Yet we find that exports to countries with high levels of pollution efficiency have no discernable effect on domestic pollution efficiency.