Targeted Trade Policy Instruments and Climate Change Mitigation: The Case of Environmental Provisions in Trade Agreements

Abstract

This article examines the effect of including environmental provisions (EPs) in preferential trade agreements (PTAs) on climate change mitigation and explores whether these effects vary based on the heterogeneity of the EPs. Our analysis combines country-level data on climate change mitigation with details on 300 types of EPs in 775 trade agreements. Empirically, we estimate a generalised method of moments regression and address potential endogeneity using instrumental variables. Our results show that the inclusion of EPs in PTAs significantly improves climate change mitigation, regardless of whether we measure performance using the Climate Change Performance Index, the Environmental Performance Index or CO₂ emissions data. The effectiveness of these provisions, however, depends on their diversity. Key benefits include reduced greenhouse gas emissions, increased renewable energy use, improved energy efficiency and enhanced climate policies. More importantly, PTAs with direct climate provisions yield greater improvements in climate change mitigation outcomes compared to those addressing environmental issues more generally or indirectly. Finally, we show that PTAs with climate change provisions are an effective tool for climate change mitigation, regardless of the development status of the signatories. However, the effects are more pronounced for North–South PTAs.