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Environmental impact of the shadow economy, globalisation, trade and market size: Evidence using linear and non‐linear methods

Abstract:

The achievement of the Sustainable Development Goals (SDG) related to the environment requires identifying new sources of environmental degradation. In this research, we examine the impact of the underground economy on polluting gas emissions. This relationship was estimated, including the role of globalization, trade, and market size. Using annual data from the World Bank and the International Monetary Fund, we found that, in the short term, the underground economy had a negative effect on global environmental pollution and a long‐term negative impact. In the long term, the cointegration results indicate a long‐term relationship between the series included in the investigation. The existence of a long‐term relationship between the variables implies that as the underground economy increases, the emissions of polluting gases also change. In the long term, policymakers can use the black economy as an instrument to influence environmental pollution. Likewise, we found a threshold effect in the index of globalization, trade, and market size. The existence of a threshold effect implies that from a threshold, the impact of globalization, trade, and the size of the market on polluting emissions is more significant. Therefore, the environmental policy must consider these aspects to achieve greater effectiveness of regulation in favor of the environment. The results were stable, including the dependence of the cross‐sections and the heterogeneity in the slope of the panel. Actions to mitigate polluting gas emissions should regulate informal and clandestine activities and take advantage of globalization and trade to improve the practices of companies and individuals.