The Significance of Environmental Standards in International Trade Agreements for Sustainability

Abstract

Amidst growing international trade and concurrent concerns about environmental degradation, particularly CO2 emissions, environmental standards are increasingly included in trade agreements. However, the actual relationship between these standards and sustainability outcomes remains unclear. Existing literature reveals a gap in systematically describing the observed trends between the stringency and enforcement of these environmental provisions and CO2 emission patterns across diverse national contexts. This thesis addresses this gap through an exploratory, quantitative study. The primary objective was to descriptively analyze the associations between environmental standards (stringency and enforcement), key economic factors (GDP per capita, trade openness, FDI), regulatory quality, and CO2 emissions trends. The study explored patterns and relationships within a specific sample, aiming to generate propositions for future research rather than test pre-defined hypotheses. Employing an Autoregressive Distributed Lag (ARDL) modelling approach on secondary panel data from the World Development Indicators (WDI) and International Monetary Fund (IMF) for 12 diverse countries over the period 2000-2023, this study shifted from initial hypothesis testing intentions due to sample size limitations (N=12). The descriptive analysis identified several notable long-run associations within the sample: higher environmental policy stringency, stronger enforcement mechanisms, and better regulatory quality were associated with lower CO2 emissions per capita, while higher GDP per capita was associated with higher CO2 emissions. Associations for trade openness and FDI were less conclusive. Diagnostic tests indicated potential parameter instability, suggesting these observed relationships should be interpreted cautiously. This research contributes by providing a descriptive analysis of these complex interactions within the studied panel and develops several propositions based on the observed trends. The primary recommendation is for future research to formally test these propositions using larger, more representative datasets suitable for robust hypothesis testing and causal inference, thereby contributing more definitively to understanding how trade agreements can support environmental sustainability.