International environmental agreement and trade in environmental goods: The case of Kyoto protocol

The Kyoto Protocol has received much criticism for its effectiveness as well as the spillover effect (i.e. carbon leakage and competitiveness loss). This paper provides the first evidence for the effect of the Kyoto Protocol on the bilateral trade in environmental goods, which can mitigate and prevent environmental damage. Using the generalized synthetic control method, I construct the counterfactual of trading pairs with Kyoto commitment and show that the export of environmental goods by Kyoto countries increases by 29–30% after the protocol enters into force. The paper further examines the top exporters (Germany and Japan) individually and also reports positive effects. Technology transfer induced by project-based mechanisms under the Kyoto Protocol, in particular Clean Development Mechanism, is found to be the potential driving force.