Where is the gray side of green growth? Theoretical insights, policy directions, and evidence from a multidimensional approach

Abstract

Addressing the geographical relocation of the pollution-intensive gray side of low-carbon green production, our study analyzes potential determinants of green and gray growth performance of industrialized/developed countries (IDCs) and industrializing/ emerging economies (IEEs) over the 1996-2015 period. We define green growth by low-carbon output, while we link gray growth to comparative advantages of pollution havens. Green and gray growth models include such predictors as domestic income and foreign direct investment (FDI) together with composite indices for globalization, environmental policy stringency (EPS), industrialization, and control of corruption. Considering non-stationarity, cross-section dependency, endogeneity, and heterogeneity concerns, we employ bootstrap and residual-based cointegration analyses followed by long-run estimations using the Common Correlated Effects Mean Group (CCEMG) and Dynamic Ordinary Least Squares (DOLS) estimators and causality examination through Dumitrescu-Hurlin and Emirmahmutoglu-Kose tests. The key findings of the study are as follows: (i) income is positively associated with green growth for both IEEs and IDCs, whereas the income-gray growth nexus is negative for IEEs. (ii) Although inward FDI stocks are positively related to green and gray growth of IEEs and outward FDI stocks are negatively associated with green and gray growth of IDCs, these relationships are mediated by EPS. (iii) Globalization encourages both green and gray growth for IDCs. (iv) Even though EPS inhibits green growth and encourage gray growth in IEEs, these direct effects widely depend on the indirect effects of control of corruption. (v) IEEs' higher gray growth performance is substantially explained by their increased industrial competitiveness, whereas the link is negative for IDCs. (vi) Control of corruption fosters both green and gray growth in IEEs. Overall, "growing gray" does not necessarily mean "not growing green" and vice versa. Globally, the low-carbon benefits of greening countries may be counterbalanced by the environmental costs of graying economies. From a policy perspective, IEEs need to reinforce environmental policies by green efficiency, green industrialization, and anti-corruption plans to decouple economic growth from carbon dioxide emissions.

How are FDI and green recovery related in Southeast Asian economies?

“…In a similar study, Khan et al ( 2021 ) found that FDI inflows can lead to an acceleration of green economic growth, but this depends on transparent and relevant policies and regulations related to FDI and green growth progress. Demiral and Demiral ( 2021 ) employed a multidimensional approach to study the stimulators of green growth. One of the main findings of their study is that FDI can be considered as a motivator of green growth.…”

Extra‐regional trade and consumption‐based carbon dioxide emissions in the European countries: Is there a carbon leakage?

“…On the other hand, according to the PHH (Demiral and Demiral 2021), firms operating in highly emission‐intensive and energy‐dependent sectors in the European countries may be carrying their emission‐intensive activities to other (developing) countries with relatively lenient environmental regulations. The increase of emissions in the trade partners may come back to Europe through its imports from outside the European periphery.…”

“…As these products are more carbon‐intensive, international trade will deteriorate the environmental quality of developed countries (Georgiev and Mihaylov 2015). On the other hand, from the pollution haven hypothesis (PHH) aspect, the increasing liberalization enables (developed) countries with stringent environmental regulations to relocate their pollution‐intensive industries to environmentally‐unregulated partners that provide pollution havens (Cave and Blomquist 2008; Demiral and Demiral 2021). This mechanism is widely referred to as carbon leakage and is usually quantified as the ratio of emission growth in trade and/or investment partners over domestic emission reduction (Naegele and Zaklan 2019).…”

Free trade and carbon emissions revisited: The asymmetric impacts of trade diversification and trade openness

“…In the past few decades, globalization has progressed at an accelerating pace, with trade openness deepening particularly in the emerging markets of Asia and Africa (Demiral et al, 2022; Demiral & Demiral, 2021). As a result, the total volume of international trade has continued to increase, growing by 75% between 2000 and 2020 alone.…”