Environmental Performance Index: History
Please note this is an old version of this entry, which may differ significantly from the current revision.

The Environmental Performance Index (EPI) developed by Yale University is regarded as an all-inclusive proxy to examine the country’s environmental conditions. Ozturk et al. also argued that CO2 emissions only cover a small part of the total environmental pollution. The recently revised EPI of 2020 comprises 32 performance indicators across 11 issue categories. It ranks countries under two domains, environmental health and ecosystem vitality, which demonstrate the environmental pollution impacts on human health and also the effects that ensue on the ecosystem through environmental pollution. The Environmental Health Index (HLT) measures the quality of air, water, and exposure to heavy metals. The Ecosystem Vitality Index (ECO) considers issues such as climate change and biodiversity. 

  • trade liberalization
  • environmental performance index
  • climate change performance
  • green-field investment
  • mediation effect
  • South and East Asian countries

1. Introduction

The world has experienced substantial economic growth over the last few decades because of trade and industrialization [1]. However, the environment and climate change have become a hot issue for debate globally due to the concerns for sustainable development [2][3]. Worldwide, the effects of climate change are not uniform. It is argued that developing countries are more likely to experience adverse environmental and climate change effects [4]. According to the World Economic Forum [5], Asia’s GDP will overtake the rest of the world’s GDP in 2020. The economic growth rate of developing Asia is higher than the world average. Such economic activities are increasing the risk of environmental deterioration and climate change in this region. It is reported that the emerging countries of Asia are more vulnerable at present in the context of environmental menaces [6][7]. Rohde and Muller [8] argued that the excessive flow of investment and speedy economic development had put Asian countries at the menace of environmental degradation and climate change. In 2018, the two major Asian economic giants, China and India, caused 27.8% and 7.3% of the worlds’ total carbon emissions [9]. The emerging markets of Southeast Asia are also experiencing similar environmental issues [10].
International trade is deliberated amongst various factors explaining the environmental issues [11][12][13]. The environment pollution and trade nexus was initially considered by economists such as Grossman and Krueger [14] and Shafik [15]. These researchers proposed a factual basis for the association between trade and the environment. The economic theory specifies that trade and foreign direct investment (FDI) lead to development and growth, especially in underdeveloped and emerging countries. Khan et al. [16] found that export of agricultural products improves the livelihood of local farmers. Trade liberalization and FDI across borders have formed several ecological challenges, locally and globally, through anthropogenic activities such as the rise in energy consumption, population growth, and economic growth and development [17]. Wacziarg and Welch [18] concluded that although trade liberalization leads to economic growth and creates employment opportunities, it worsens the ecological conditions of the host countries through the shift of contaminated and mass industrialization, higher energy consumption, and urbanization, which ultimately cause climate change.
In one aspect, trade liberalization augments the movement of goods and services and extends economic activities, while it puts grave effects on the environment. Liu et al. [12] demonstrated that international trade permits nations to transfer pollution-concentrated industries to other countries. In another aspect, international trade helps developing countries to increase their income level, which can be consumed to alleviate environmental pollution in the future [14]. Grether and DeMelo [19] stated that trade in developing countries led to either specialization or increased pollution-intensive production. Antweiler et al. [20] argued that the contradictory findings related to the emission–trade nexus arise from contradicting scale, technique, and composition effects. The study found that international trade creates relatively small changes in pollution concentrations when it alters the composition, and hence the pollution intensity, of national output.
Further, it is perceived that FDI amplifies the environmental degradation, as it increases the economic activities in the host countries. However, on the other side, FDI may introduce cleaner technologies and better management practices to improve the environmental quality of host countries. In this regard, by separating the effect of green-field FDI and mergers and acquisitions (M&A) on the environment, Ashraf et al. [21] found that green-field FDI increases pollution, supporting the pollution haven hypothesis, while M&A decrease pollution, in line with the halo effect hypothesis. Greenfield FDI refers to investment which involves building everything the business needs from the ground. In addition, global climate change has already had observable effects on the environment. Climate change may aggravate erosion, decline in organic matter, salinization, soil biodiversity loss, landslides, desertification, and flooding [22]. The effect of climate change on soil carbon storage can be related to changing atmospheric CO2 concentrations, increased temperatures, and changing precipitation patterns.
Previously, different proxies of the environment have been used by researchers, such as sulfur dioxide (SO2) emissions [23], nitrous oxide (N2O) emissions [24][25], and particulate matter (PM 2.5) [26]. However, the most relevant and frequently used indicator of the environment is carbon dioxide (CO2) emissions [27][28][29][30]. Each proxy provides a record of environmental change, but the process of spatially combining these indicators into a large scale requires careful statistical evaluation.

2. Trade Liberalization and Environmental Performance Index: Mediation Role of Climate Change Performance and Greenfield Investment

In the prevailing literature, numerous studies have explored the association between trade and the environment in various countries. The role of trade liberalization in encouraging or discouraging environmental deterioration has been a contentious issue in the literature. It has been evident that the association between trade liberalization and the environment is not uni-directional [20][31][32][33]. Udeagha and Ngepah [34] examined the association between trade and environmental quality in South Africa. The findings show that the country has a comparative advantage in exports of products that necessitate energy that is met by consuming fossil fuels, which eventually deteriorates the environment significantly. By utilizing the instrumental variable quantile approach of panel data, Kim et al. [28] studied the trade and environment nexus for northern and southern regions of the US. The study revealed that international trade with the North increases CO2 emissions, whereas trade with the South mitigates CO2 emissions, with a relatively larger effect for less polluted host countries. The findings suggest that, in terms of CO2 emissions, trade benefits the advanced countries but could hurt the developing countries when trade with high-income trading partners occurs. Dogan and Seker [27] explored the effect of real income, energy consumption, renewable energy, financial development, and trade on the environment by using the fully modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) approaches; the outcomes found a positive association between energy consumption and CO2 emissions, while a negative association was found for renewable energy, economic growth, energy use, and trade.
Omri et al. [35] scrutinized the association between trade, economic growth, and financial development on CO2 emissions by employing simultaneous-equation models for 12 MENA panels over the period 1990–2011. The outcomes showed a two-way directional causality between economic growth and CO2 emissions, and a one-way directional causality was found between trade and CO2 emissions. Aller et al. [36] explored the role of world trade in environmental sustainability by pinpointing the important countries engaged in social networking. The findings showed that trade networks adversely affect developed countries’ environments while regenerating developing countries’ environments. The study argued that stronger environmental policy in developing countries for multinationals may help to alleviate environmental degradation. Mahrinasari et al. [37] considered the panel of ASEAN countries to study the trade and environment nexus using DOLS and FMOLS. The outcomes suggested that trade liberalization significantly and positively influence carbon emissions. Ahmed et al. [38] concluded that although trade liberalization spurs economic growth, it does so at the cost of environmental degradation. Several other prior studies also report similar findings [39][40][41][42][43][44][45][46].
In contrast to some of the studies discussed above, it has been argued that the effect of trade liberalization is not as detrimental for the environment as is considered [47][48][49][50][51][52][53][54][55]. Zhang et al. [56] argued that international trade generally affects industrial output composition, leading countries to concentrate on those productions where their relative costs are almost lower. If trade leads a country to concentrate on pollution-intensive production, then the composition effect increases pollution and causes climate change. Alternatively, if trade leads a country to focus relatively on clean goods production, this composition effect sinks pollution and recovers the quality of the environment. The enormous economic growth due to merchandise exports has been evident in the developing countries of Asia. Li et al. [57] argued that if economic gains stress protection of the environment or deliver funds to invest in environmental protection strategies, alterations in production techniques may be helpful, that is, the technique effect may lead to less pollution by utilizing income generated from trade. The evidence of effects of international trade on environmental performance in various countries differs by income, or maybe due to differences in policies, economic structure, economic openness level, and specific variations of the country [58][59][60].
Adeel et al. [61] examined the influence of foreign direct investment, energy consumption, economic growth, and urbanization on EPI. The findings showed that foreign investment has a significant adverse effect on environmental performance, but economic growth is positively associated with EPI. Ashraf et al. [21] found that green-field investment flowing into poorer countries worsens the environment, while M&A flowing to industrialized economies reduce pollution. Liu et al. [62] argued that FDI had distinct effects on different environmental pollutants. The study finds that FDI reduced waste soot and dust but increased wastewater and sulfur dioxide. Bildirici and Gokmenoglub [63] found that changes in CO2 emissions are linked with terrorism, FDI, and growth in the long run. However, Demena and Afesorgborb [64] argued that the underlying effect of FDI on emissions is close to zero. The results remain robust for different groups of countries and for different pollutants.
Debates over the merits of trade liberalization have been going on for some time. Still, over the last decade, the issue has intensified as environmentalists and economists have squared off over the environmental consequences of trade openness. It is argued that trade contributes majorly to the economic growth and development of a country. On the one hand, it generates wealth by providing employment opportunities; while on the other hand, it leads to environmental deterioration. The earlier studies have reported mixed results regarding trade liberalization and the environment. To the authors’ knowledge, previous studies have generally assessed the causal association of trade and CO2 emissions, but they have not considered a comprehensive proxy to measure the environment, (i.e., EPI). We investigated trade liberalization and EPI in developing Asian countries from 2002 to 2016 based on available data; the conventional methods for panel data (i.e., random effects and fixed effects) were employed. Unlike previous studies, mediation and difference analyses were performed to investigate the systematic effect of trade liberalization.
The empirical findings indicate that the environmental quality measured by EPI score slumps as more trade liberalization occurs. It suggests that in developing countries, trade liberalization has more hazardous environmental effects. It may suggest that trade liberalization boosts energy consumption and potentially causes the deterioration of the environment. However, GDP has a beneficial effect on environmental performance as the countries are more inclined to invest in energy-efficient technologies. Economic growth and increase in per capita income amplify the likelihood of people to claim an unpolluted environment. There is no doubt that FDI is a principal factor for economic development. Still, developing countries should focus more on clean investment and technology transfer, as the results are found to be insignificant. Urbanization was also found to be adversely related to EPI. Moreover, mediation analysis and group differences were also conducted to address the endogeneity and cross-sectional differences. The mediation analysis showed that trade and EPI are partially influenced by climate change; while in the case of green-field investment the results are not found to be significant. In group analysis, the findings showed that countries having higher per capita income improve environmental performance. On the contrary, countries having higher manufacturing industries and population growth lessens the environmental performance.
However, the emerging countries of Asia are moving towards an eco-friendly-based domestic production process, yet the international trade in such countries is not focused on environmentally friendly goods. The key policy upshot from the outcomes is that developing countries must not only focus on implementing the strategies needed for trade liberalization but also focus on environmental reforms to decrease the worst environmental effects of climate change. Countries should emphasize the quality of exports instead of just the quantity. The conclusion suggests that these emerging countries of South and East Asia should put forth an inclusive strategy to negotiate and collaborate on green trade by diminishing bad energy and emission-intensive imports and improving climate change performance measures. A general method to lessen environmental pollution and climate change is through emphasizing green domestic consumption. Our empirical outcomes also specify that South and East Asian emerging countries should emphasize substituting energy-efficient production processes for trade and domestic products. It is necessary to stress the dual role of reducing the adverse externalities deriving from trade liberalization. The other issues, such as urbanization, industrial development, overcrowding, and exploiting the positive externalities such as public provisioning of waste management, eco-friendly infrastructure, and transportation systems, also need to be improved. The policy implications discussed here are aligned with the prior studies [21][27][61][35][36][37][65][66].
Moreover, the emerging developing nations should speed up the shift from fossil fuels to less polluting alternative energy sources to reduce carbon and other emissions locally and globally. Use of energy from fossil fuels is an important channel for trade and FDI’s negative impact on the environment. According to the IPCC, renewable energy such as solar, wind, and hydropower can be very beneficial to reduce the pollution levels in Asia. The sustainable and healthy use of natural resources is very important for the betterment of future generations. The findings emphasize the need to have effective and improved methods of energy production and distribution. The governments of South and East Asian countries should allocate more budgets for research and development to plan environmentally friendly trade policies. More investment, training, transparency, education, and collaboration are required to reduce the negative effects of trade on the environment.

This entry is adapted from the peer-reviewed paper 10.3390/su13179734


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