Environmental policy, green trade and sustainable development in Europe: New perspective on the Porter hypothesis

This study tests the validity of the Porter hypothesis through the examination of the joint effects of green trade and environmental policy stringency on sustainable development in the European Economic Area. To achieve the study objective, data for 14 countries within the region between 2003 and 2015 is analyzed using advanced panel estimation techniques - panel method of moments quantile and nonparametric time-varying coefficient panel models. The empirical analysis yields a number of interesting results. In confirmation of the Porter hypothesis, the interaction term is positive and significant. Specifically, a percentage increase in environmental policy stringency raises the positive impact of green trade on sustainable development by 0.005%. This interactive effect also ranges between 0.002% and 0.007% across quantiles. This indicates that the higher the level of sustainable development, the higher the moderating impact of environmental policy stringency on the relationship between green trade and sustainable development. This suggests that stringent policies are able to induce green technological shocks that cause efficiency improvements and innovation, which in turn promote sustainable development either directly or indirectly through their interactions with green trade. Moreover, the individual and synergistic impacts of environmental policy stringency and green trade are time-varying and sensitive to economic conditions. They become more pronounced in periods of major regional/global economic events. Responsible use of strict environmental policies is advocated, and the removal of green trade barriers is encouraged.