Environmental policy stringency and fossil energy trade in OECD countries

This study investigates the impact of environmental policy stringency on the trade of fossil fuels—including coal, oil, and natural gas—in 27 OECD countries over the period 1994–2020. Employing panel cointegration and causality techniques, the analysis incorporates non-renewable energy consumption, real effective exchange rate, and financial development as control variables. The results indicate that more stringent environmental regulations significantly reduce fossil fuel trade, suggesting potential improvements in environmental quality. In contrast, higher levels of non-renewable energy consumption and financial development are associated with increased fossil fuel trade, reflecting persistent economic-driven environmental pressures. Additionally, an appreciation in the real effective exchange rate is linked to a reduction in fossil fuel trade. These findings underscore the pivotal role of stringent environmental regulations in mitigating fossil energy trade and enhancing environmental outcomes, while also highlighting the importance of complementary macroeconomic policies and international cooperation in facilitating sustainable energy transitions.