Greener Trade: The Impact of Trade Agreements on the Emission Intensity of Trade Flows

Free trade agreements play a crucial role in shaping global trade flows, although the understanding of their environmental impact is limited. This study investigates whether trade agreements influence the emission intensity of trade flows, which is measured as greenhouse gas emissions per unit of value added generated during the production of exported goods and services. Using a gravity model with a Poisson Pseudo Maximum Likelihood estimator and sector-level data across 76 countries from 1995 to 2020, the study assesses four key questions: whether trade agreements reduce the emission intensity of trade flows at the sector level; whether environmental provisions within agreements enhance this effect; and whether the impact varies by income level and economic sector. The findings reveal a modest but statistically significant reduction in emission intensity associated with trade agreements. Stronger reductions are observed when agreements contain environmental provisions and when low-income countries export to high-income ones. However, the effects are heterogeneous across sectors, with some industries showing increased emission intensity. The results suggest that while trade agreements can support cleaner production processes, their limited impact implies they should not be viewed as an instrument for addressing climate change.