Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 Studying the Effect of Information Availability on Carbon Dioxide Emissions Level in Developing Countries Hoda Hassaballa* Recently, more concerns are raised regarding the rise of pollution emissions level and the loss of environmental quality. This is even magnified in the case of developing countries. In the literature, the traditional determinants of pollution emissions level are income per-capita levels, manufacturing value added, population and trade openness. Knowledge and information availability can also, affect pollution emissions level. This is present in three levels: First, through the underestimation of the pollution emission levels by self-reporting firms resulting into a principalagent problem. Accordingly, correct penalties will not be imposed by the government on polluting firms. This will result into higher levels of pollution emissions. Second, firms who have access to information about the environmentally friendly techniques of production that are cost effective are more likely to have low levels of pollution and to abide by the legal standard. Third, through the spread of information about polluting firms and/or products, firms are keener to reduce their pollution emissions level in order not to lose public acceptance. However, empirical analyses that examine the effect of information availability on pollution emissions level are not comprehensive. To fill this gap, this research paper studies the effect of information availability on per capita carbon dioxide emissions level in developing countries over the period 1995-2013. A fixed effects panel data model is used. The results indicate that information availability is a significant determinant of per capita carbon dioxide emissions level. In addition, the results confirm the usage of polluting techniques of production as displayed by the positive significant coefficients of income per-capita and the trend term. Policy implications to reduce pollution emissions level are also given. JEL Codes: O3 and Q5. 1. Introduction There is a global concern about the rising pollution emissions level in particular and the loss of environmental quality in general. Global warming, the rise of sea level, the loss of biodiversity and deforestation are among the main problems that threaten our planet earth. The situation is even worse in developing countries that usually rely on traditional dirty techniques of production and erroneous consumption patterns. As a result, many researchers directed their efforts to study the determinants of pollution emissions level. In the literature, the commonly used determinants of these emissions level are income percapita level, trade openness, population growth and manufacturing value added (Mihci et al, 2005; Cole, 2007; Hassaballa, 2015(A)). However, knowledge and information availability can also affect the level of pollution emissions. This is found in three levels: *Dr.Hoda Hassaballa is a Lecturer of Economics at The Department of Economics, Faculty of Business Administration, Economics and Political Science, The British University in Egypt. Address: Sewis Desert Road, Sherouk City, Cairo 11837, P.O. Box 43, Egypt. Email: hoda.hassaballa@bue.edu.eg, Mobile: +201001101974. Fax: +202 26300010 / 20. 1 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 First, through the underestimation of the pollution emission levels by self-reporting firms resulting into a principal-agent problem. This happens when the agent (polluter) has access to information about his pollution emissions level which the princpal (the government) does not have. Accordingly, incorrect penalties will be imposed by the government on polluting firms. This will result into higher levels of pollution emissions. This may occur when it is costly or difficult to measure environmental variables. Second, firms who have access to information about the environmentally friendly techniques of production that are cost effective are more likely to have low levels of pollution and to abide by the legal standard. Hence, access to information will give these firms a superior position. Third, through the spread of information about polluting firms and/or products, firms are keener to reduce their pollution emissions level in order not to lose public acceptance. This has been facilitated by the recent developments in information technology in general and the spread of the internet usage in particular. Nevertheless, the empirical investigation on the effect of information availabilty on pollution emissions level in developing countries are incomplete. To fill this gap, this research paper studies the effect of information availability on per capita carbon dioxide emissions level in developing countries over the period 1995-2013. A fixed effects panel data model is used. The rest of the paper is organised as follows: Section 2 provides the theoretical and empirical review. Section 3 describes the methodology and the empirical model used. Section 4 shows the main findings and finally, section 5 concludes and presents the corresponding policy implications. 2. Literature Review For a long period, it was generally assumed in the mainstream economics that information is complete. This was apparent in the work of Debreu (1959) and Arrow (1964) on the competitive general equilibrium theory. However, this assumption has proven to be unrealistic which resulted into the evolution of the economics of information. According to Stiglitz (2000), the most important development in economics in the contemporary period is the economics of information. This is because it has altered the general belief of perfect information, has shown that information can be costly and has highlighted the effects of asymmetric information on firms’ and individuals’ decisions (Stiglitz ,2000). Many researchers contributed in this field as early as Pool (1984) who tried to measure the flow of information as well as Machlup (1962) and Porat (1978) who concentrated on measuring the value of information. However, due to the absence of a general agreement on how to define information, these attempts were mainly theoretical and were directed towards measuring the effects of information instead (Bates, 1985). There is an on-going debate in the literature on whether information is a private or a public good. On one side, Boulding (1966), Demsetz (1967), Marshall (1974) and Stigler (1983) have claimed that information is a private good especially if it is additional information related to a market due to economic benefits incurred. On the other side, many others such as Samuelson (1954; 1958) have believed that information is a public good since its consumption by one individual does not prevent others from enjoying the same benefit. The debate is also present in information valuation. The inability to value information correctly could result into its violation of the economic premise of social efficiency (Arrow1962; Hall, 1981). The reason behind this is the uniqueness of information in which 2 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 there is a degree of uncertainty in outcome and exchange of information goods (Bates, 1985). In addition, information as a good is distinctive in its multiple replications with almost no cost as well as its acquisition is non-excludable (Bates, 1981). This resulted into the violation of the condition of optimality and efficiency in which marginal cost should be equal to marginal revenue of a good. However, Coase (1974) counter-attacked this argument by highlighting that information is like any economic good. This is because its value is determined by the expected value of its use which results into a fixed value at the end. It is true that there is a degree of variability that arises from different tastes and preferences (Bates,1985). Yet, this is also present in any other economic good. Hence, it can be concluded that there are many debatable issues in the field of economics of information that require lots of future research. The link between economics of information and environmental economics is present in the regulatory side. Theoretically, there are three different regulatory approaches of pollution emissions level namely, command-and-control approach, economic incentive approach and non-mandatory approach. Each of these regulates the pollution emissions level from a different perspective. For instance, the command-and-control approach sets the government responsible for regulating pollution emissions level. It puts a standard that polluting firms should abide by. The regulatory authority is also in charge of deciding on the type of technology used, inspection, monitoring pollution emissions level and setting the appropriate penalties for exceeding the legal emissions limit (Tietenberg,1990). Command-and control approach is preferred when the pollution emissions are very toxic, marginal benefit of decreasing pollution emissions level is extremely inelastic or the marginal abatement cost curves (MAC) are the same for all firms to be easily deducted by the government (Hassaballa, 2015(B)). On the other hand, command-and-control approach is usually criticized of lack of efficiency, rigidity which discourages the polluting firms from compliance and the occurrence of principle-agent problem. The latter happens when the agent (polluter) has access to information about his pollution emissions level which the princpal (the government) does not have.1 Accordingly, incorrect penalties will be imposed by the government on polluting firms. This will result into higher levels of pollution emissions. This may occur when it is costly or difficult to measure environmental variables. Hence, information availability plays an essential role in determining the pollution emsiisons level. On the other hand, the economic incentive approach is more flexible. According to this regulatory approach, the polluting firms are competing to decide on the best technique of production that is cost effective and reduces pollution emissions level. Hence, the firms are free to decide on the suitable technique they use as long as they abide by the legal standard. In addition, firms are rewarded if their pollution emissions level is below the legal limit (Blackman, 2006, and Tietenberg, 1990). Permits and fees are the two main policies used under economic incentive approach. Again, the role of information here is very important. This is because the government can choose the use of economic incentive approach due to lack of knowledge of the suitable technique of production that reduces pollution emissions level. In addition, firms who have access to information about the environmentally friendly techniques of production that are cost effective are more likely to have low levels of pollution and to abide by the legal standard. Hence, access to information will give these firms a superior position which enables them to pay fewer fees and enjoy additional rewards. Not only this, but also information is important because emission fees system will not be successful unless the government has the capability of 3 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 deciding on the correct amount of fees to be charged. In many developing countries, knowing the correct fees is constrained by lack of efficient technical, administrative and managerial systems. In case of permits, this problem is not present as prices of permits are set by the market which entails that any violation of such market mechanism will render the economic incentive approach ineffective. Lastly, the non-mandatory approach regulates pollution emissions level through voluntary actions of polluting firms. In the absence of regulations, firms will not voluntary adopt any measure of pollution control unless it is in their interest (Storey and McCabe, 1999). This occurs when firms are threatened by penalties costs, market pressures and public pressures. All these push firms to take self-regulation actions towards pollution control. The role of information is also vital here. This happens when firms are afraid of losing public acceptance as a result of the release of environmental information about these firms (Khanna and Anton, 2002). Theoretically, each firm will compare the costs of public disclosure of ‘‘bad’’ information to the abatement costs that the firm incur to be labelled by the public as green producer (Konar and Cohen,1997). Nowadays, consumers have an increasing demand of a cleaner environment and this will affect their choices of products. Thus, firms are keener to reduce their pollution emissions level in order not to lose public acceptance and to capture a wider market share. After this theoretical review of different regulatory approaches of emissions level, it is apparent that information availability affects deeply pollution emissions level which in turn reflects the strong link between economics of information and environmental economics. On the empirical level, many studies such as Terkla (1984), Dudek and Palmisano (1988), Feldman and Raufer (1987) and Tietenberg (1989) compared command-and-control approach to economic incentive approach. Their findings were mainly that efficiency gains are achieved when economic incentive approach is used. This is because economic incentive approach provides incentive to firms to compete and innovate to reach the best technology with minimum cost. Dudek and Palmisano (1988) showed that this is also true in practice; however, the size of innovations is not large. In addition Feldman and Raufer (1987) and Tietenberg (1989) showed that economic incentive approach has another main advantage which is absent in command-and-control approach, namely, leasing credits. With respect to non-mandatory approach, many empirical studies were carried out such as Khanna (2001), Dasgupta et al. (2000), Videras and Alberini (2000) and Henriques and Sadorsky (1996). In parallel to the theoretical studies, these empirical studies also showed that the chief motivation of firms to take voluntary control of pollution is their expectation to make profit. Since this will be in the firms’ interest, it will be self-enforced. The effects of regulatory threats, past environmental performance, desire for public recognition and size of the firms were empirically examined and quantified. To the author knowledge, very little empirical research was conducted to examine explicitly the effect of information availability on pollution emissions level. For example, Khanna (2001) and Banerjee et al. (2003) studied the effect of public pressure on joining non-mandatory approach. Their results showed that it was significantly and positively affecting the motivation of firms to join non-mandatory approach. It is apparent here that while doing so, the effect of information availability was implicitly studied. In line with that, others like Arora and Gangopadhyay (1995) and Kennedy et al. (1994) have studied the 4 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 effect of information on consumer or firm behaviour. Moreover, Hamilton (1995) and Konar and Cohen (1997) examined the behaviour of firms in response to a significant stock market reaction as a result of disclosure of information through the toxic release inventory (TRI). Their results confirmed that firms that had the largest decrease in their stock prices on the day of the release of TRI later decreased their emissions more than other firms in the industry. This shows how information availability implicitly affects pollution emissions level through its effect on stock prices. Finally, Foulon et al. (1999) studied the effect of disclosure of information about polluting firms on emissions levels and degree of compliance. This was done through examining the effect of the release of British Columbia’s list of polluters on pollution emissions level. Their results indicated that the effect of disclosure of information about polluting firms on pollution emissions level and compliance is greater than that of fees or penalties. After this theoretical and empirical review, it becomes evident that information availability affects the level of pollution emissions. Nevertheless, empirical analysis that explicitly measures such an effect is rare to find. For that, this research paper constitutes a step forward to have a better understanding of the explicit effect of information availability on pollution emissions level. 3. The Methodology and Model The empirical model investigates the effect of information availability on per-capita carbon dioxide emissions level based on the econometric work of Cole (2007). A dynamic panel data model is used to examine the effects of information availability, per-capita income, trade openness, manufacturing, population growth and technical progress on per-capita carbon dioxide emissions in developing countries over the period 1995-2013 for which data is available. First difference is used instead of logs due to the presence of negative observations. 3.1 The Econometric Approach The following fixed effects panel data model with homogenous slopes is considered: EM it INFit X it EM it 1 i T i it (1) For country i at time t, EM is the per-capita carbon dioxide emissions measured in metric tons per capita; INF is the measure of information availability; X is a vector of explanatory variables that affect emissions level other than information availability; λ is the fixed effect dummy variable for individual unobserved effects, T is a trend term and ε is the error term. There are many benefits of using a panel data set such as the increase of the sample size resulting in a better estimation and the increase of the power of the test statistics. Hence, it is chosen instead of cross section or time series sets. 3.2 The Choice of Variables To measure the effect of information availability on pollution emissions level, the number of internet users is used. According to Wu (2011), internet access results into a more transparent society in which information becomes available to different economic agents 5 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 including consumers, producers and the government. Hence, it can be used as a source of public access to information on polluting firms. In addition, the internet can supply firms with the most up-to-date techniques that can be used to reduce their emissions level. In a nutshell, the internet makes information available at a very low cost. Not only this, but because the majority of contributors to the internet are the people and not the governments, this results into a high degree of transparency (Wu, 2011). Hence, it can be used as a proxy measure of information availability. Furthermore, it was used before by other researches such as Bernhard (1993), Hanson (2008), Schroth and Sharma (2003) and Wu (2011). It is expected to have a negative relationship between the number of internet users and pollution emissions level. The logic behind this is that the more available the information is, reflected by the number of internet users, the less the level of pollution emissions will be. In addition to information availability, the traditional determinants of pollution emissions level such as per capita income level, manufacturing value added, population growth and trade openness are used to investigate their effects on pollution emissions level (Mihici, 2005; Cole, 2007; Hassaballa, 2015(A)). The effect of income on pollution emissions level is tested through the use of per capita income. There will be a negative relationship between pollution emissions and per capita income in the case of usage of environmentally friendly techniques of production. Contrary to this, this relationship will be positive illustrating the case of usage of traditional dirty techniques of production. This is also true in the case of manufacturing value added in which the share of industry in GDP is measured to examine the effect of manufacturing on pollution emissions level. The reason behind this is that manufacturing always carries the burden of increasing pollution emissions level. Accordingly, the nature of the relationship is still indefinite. Population growth can be also used to determine pollution emissions level. Larger population overburdens environmental resources and leads to higher levels of consumption and wastes. Hence, population growth and pollution emissions level exhibit a positive relationship. Lastly, trade openness, calculated through the sum of exports and imports to GDP, is used. This is because trade liberalization also affects pollution emissions level. Similarly, the nature of the relationship is indistinct as it depends on the type of traded goods. Carbon dioxide per capita is used to measure pollution emissions level. Carbon dioxide is a valid measure for pollution emissions since it is the main source of global warming. Furthermore, it is widely used by many researchers such as Yaung (2001) and HoltzEakin and Selden (1995). In addition, there is a strong correlation between carbon dioxide and other pollutants.2 Lagged value of carbon dioxide emissions level is used to test whether there is persistence or correction of emissions. A trend term is also used to reflect technical progress over time. The sources of data are the World Development Indicators database. Missing data were calculated through the use of linear interpolation. 3.3 Estimation To examine the effect of information availability on pollution emissions level, a dynamic panel data model is used. The sample studied includes 25 developing countries over the period 1995-2013.3 Hausman test between random effects and fixed effects models was carried out. The results showed that fixed effects model is more adequate as a result of the rejection of random effects model. Hence, fixed effects panel data model is used as 6 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 indicated in equation 1. Table (1) shows the results of the panel least square estimation of equation 1 in which at time t in country i, carbon dioxide emissions measured in metric ton per capita (CO2) is regressed on the change of its lagged value, information (Inf) measured by the number of internet users (per 100 people), per capita income (Y), manufacturing value added (MANU), population growth (pop), trade openness (TO) and a trend term. 4. The Findings The empirical results illustrated in table (1) indicate that information availability is not a significant determinant of carbon dioxide emissions level. In addition, the coefficients of all other variables are found insignificant with the exception of lagged carbon dioxide emissions and income per capita. The coefficient of lagged carbon dioxide emissions is found significant and negative at 5% level. This shows that there is correction of pollution emissions over time. As for income per-capita, its coefficient is found significant and positive reflecting the use of polluting techniques in production. These two results are contradictory. In addition, the results of information availability, trade and population seem not meaningful especially if you relate that to developing countries. Accordingly, white test for heteroskedasticity was used. The results of the White test indicated the presence of heteroskedasticity. To correct for this, generalized least squares (GLS) weights and White correction were used as a robust check. The results of these estimations are shown in table (2) and table (3) respectively. Table 1: Empirical Results of Equation 1a Dependent Variable CO2 Inf Y MANU TO Pop Trend Co2(-1) Constant a R Squared Coefficients -0.009859 (-1.658664) 0.000213 (2.210468)* 0.004941 (0.502958) 0.000288 (0.173208) 0.258598 (1.979953) 0.005328 (1.584728) -0.111997 (-2.244220)* -0.018453 (-0.508041) 0.0856 t- values are in parentheses * Significance at 5% level 7 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 Table 2: Empirical Results of Equation 1 (GLS) Dependent Variable CO2 Inf Y MANU TO Pop Trend Co2(-1) Constant R Squared Coefficients -0.005867 (-2.309365)* 0.000394 (7.010905)** -0.006118 (-1.254066) 0.001325 (1.630289) 0.077479 (1.026656) 0.002725 (2.864668)** -0.107330 (-1.482642) -0.023935 (-2.328432) 0.206038 a t- values are in parentheses * Significant at 5% level **Significance at 1%, 5% and 10% levels Table 3: Empirical Results of Equation 1 (White Correction) Dependent Variable CO2 Inf Y MANU TO Pop Trend Co2(-1) Constant R Squared Coefficients -0.005867 (-2.059542)* 0.000394 (7.118890)** -0.006118 (-1.517632) 0.001325 (1.511496) 0.077279 (1.069211) 0.002725 (2.230773)* -0.107330 (-1.989394) -0.023935 (-1.993573) 0.206038 a t- values are in parentheses * Significant at 5% level **Significance at 1%, 5% and 10% levels 8 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 After applying general least squares weights and White correction, the empirical results of equation 1 show that information availability is a significant determinant of pollution emissions level. This is because its coefficient is found significant and negative. This indicates that information availability decreases pollution emissions level in developing countries. In addition, income per-capita has a positive significant coefficient. This indicates the prevalence of polluting techniques of production in developing countries. This moves in line with the result of the trend term. The trend term is found significant and positive which indicates that there is deterioration of the control of pollution emissions over time. Hence, contradictory results have been eliminated. All other explanatory variables are found insignificant which can altered in the future by increasing the sample size. It is important to highlight that R squared is relatively low. However, this can be expected in dynamic fixed effects panel data model. 5. Conclusion and Policy Implications This research paper studied the effect of information availability on pollution emissions level. This was conducted in a dynamic panel data model. A fixed effects panel data model was used for a sample of developing countries over the period 1995-2013. The empirical results highlighted that information availability has an influential effect on pollution emissions level. In addition, there is a negative relationship between information availability and pollution emissions level. Furthermore, positive correlation between economic growth and pollution emissions level was detected. Since, this was also the case for the trend term, it becomes apparent that developing countries rely heavily on polluting techniques of production and lack the needed attention to apply appropriate pollution control measures. These findings necessitate designing appropriate policy implications that would enhance environmental quality and reduce pollution emissions level in developing countries. These include: 1. Incorporate environmental objectives with economic objectives and reflect that in various governments’ plans and actions. 2. Enforce stringent environmental laws through the adoption of a comprehensive system of inspection, monitoring and measurements of pollution emissions level by developing countries’ governments. This is to minimize the occurrence of principalagent problem and to ensure that pollution fees are calculated correctly. 3. Ensure compliance through the application of the ‘carrot and stick’ principle. That is to provide incentives to firms in the form of financial, technical and managerial assistance to ensure compliance. At the same time, impose penalties on polluting firms that do not abide by the legal standard. 4. Monitor and assess polluting firms’ activities to announce that to the public in regular publications. Make these information available through different media channels whether formal or informal ones. 5. Spread awareness among consumers and producers about the real threats that our environment faces in the absence of pollution emissions correction scheme. 6. Learn about successful stories of different countries that managed to reduce their pollution emissions level to judge its applicability. 7. Be updated with new techniques of production that are cost effective and at the same time environmentally friendly. 9 Proceedings of Annual Switzerland Business Research Conference 12 - 13 October 2015, Novotel Geneva Centre, Geneva, Switzerland ISBN: 978-1-922069-86-3 8. Ban giving licences to new polluting firms and design a time frame to old polluting firms to adjust their emissions level accordingly or else their licences will be withdrawn. 9. Choose the most suitable regulatory approach to the country’s financial, technical, administrative and institutional capacities to ensure its success. All in all, it is very essential to preserve our environmental resources and to avoid its depletion. Any legislation or action necessary to achieve that should be implemented. This should be set as a number one priority in developing countries in particular in order to ensure sustainable development and to provide a healthy way of life to many generations to come. Perhaps for that, we will be remembered. End Notes 1. For adverse selection problems related to environmental regulations, see, for example, Sheriff (2009) and Quillérou (2010). 2. Hoffmann et al. (2005) highlighted that the correlation coefficients of carbon dioxide with nitrous oxide and sulfur dioxide are 0.9529 and 0.9536 respectively. 3. 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