When Digital Trade Meets Regulatory Distance: Implications for Carbon Intensity in International Trade

Digital services trade is often viewed as a pathway to lower carbon intensity by reducing reliance on carbon-intensive physical trade. However, its environmental benefits may depend critically on the regulatory environments governing cross-border digital interactions. Integrating institutional distance theory with environmental economics, this study examines how regulatory divergence in digital services trade shapes the carbon intensity of international trade. Using bilateral trade data and country-level measures of digital services trade regulations, renewable energy capacity, and environmental policy rigor, we analyze the effects of digital regulatory gaps on carbon emissions embodied in exports. The results show that greater regulatory divergence significantly increases both total carbon emissions and export carbon intensity. The analysis further reveals that the scale effect associated with increased trade volume dominates the technique effect, such that the potential environmental benefits of digitalization are frequently offset by structural inefficiencies and compliance costs induced by regulatory fragmentation. Moreover, exporters’ renewable energy capability amplifies—rather than mitigates—the carbon-intensity-increasing effect of digital regulatory gaps, indicating that institutional misalignment imposes higher environmental opportunity costs on countries with greater low-carbon potential. By contrast, environmental policy rigor in importing countries does not significantly attenuate these effects. Overall, the findings highlight regulatory alignment as a critical condition for realizing the environmental benefits of digital trade.