The Role of Intra-Industry Trade, Foreign Direct Investment, and Renewable Energy on Portuguese Carbon Dioxide Emissions

Abstract

This paper revisited the link between intra-industry trade (IIT) between Portugal and Spain and Portuguese carbon dioxide (CO2) emissions. The research also considers the effects of foreign direct investment (FDI) on CO2 emissions, pondering the arguments of the pollution haven hypothesis and the halo hypothesis. As an econometric strategy, this investigation has applied panel data, namely a Pooled Mean Group of an Autoregressive Distributed Lag (ARDL) model and Panel Quantile Regression (PQR). The preliminary unit root tests indicated that IIT, Portuguese and Spanish renewable energy, and Portuguese FDI are integrated into the first differences and stationary with the second generation test (Pesaran methodology). In the next step, this study applied the multicollinearity test and cross-dependence between the variables. The variance inflation factor test demonstrated that FDI and IIT have no multicollinear problems. However, as expected, collinearity exists between Portuguese and Spanish renewable energy. Regarding the cross-sectional dependence test, this investigation concluded that the variables have a dependence between them. The cointegration test revealed that the variables are overall cointegrated. In the econometric results with the ARDL estimator, this investigation has found that IIT between Portugal and Spain is negatively correlated with Portuguese CO2 emissions, showing that this type of trade encourages environmental improvements. However, the PQR demonstrates that there is an opposite relationship. According to this, Portuguese and Spanish renewable energy is negatively impacted by CO2 emissions, revealing that renewable energy aims to decrease pollution. Finally, Portuguese FDI reduces CO2 emissions, which is explained by product differentiation, innovation, and monopolistic competition.

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