Can Trade Integration Reduce Emissions from Production? The Product Composition Channel

In a trade model incorporating within-firm productivity differences in intermediate products, we show that specialization in the production of intermediate products enabled by decreased trade costs can reduce firm-level emissions. Using firm-level data from China (1998-2012), we provide supporting evidence in the context of domestic trade. Increased domestic trade integration, associated with the expansion of China's railway network, reduces emissions of sulfur dioxide, carbon dioxide, and other pollutants. Counterfactual analysis indicates that without the 1.88% (1,203-kilometer) railway expansion in 2005—--the year in the middle of our sample period, as an example---national SO2 emissions would have been 0.43% higher.