A structural decomposition analysis of the pollution terms of trade

The Antweiler Pollution Terms of Trade Index (PTTI) measures environmental gains or losses sustained by a country from international trade. Measuring total exports and imports in value terms distorts the results when the index is used for comparisons and analysis. Structural Decomposition Analysis (SDA) can provide an estimate of such distortions, due to price effects. This paper proposes a procedure of SDA of PTTI changes to deal with this problem. It measures impacts of changes in prices of traded outputs, changes in the real trade mix and volume, and changes in technology, but can be extended to account for other factors too. The pollution content refers here to pollution generated directly in the production of outputs, actually traded in the international markets. However, additional induced effects due to international trade can be included, if they are estimated. Pollution intensity is expressed per unit of total exports and imports respectively, and not per unit of value added, an issue discussed. A case study for The Netherlands is provided for the period 2007-2010. PTTI values and their annual changes are estimated for emission contents in greenhouse CO₂ equivalent. Results confirm the significant and distortive role of prices in measurements and comparisons.