Informal Emissions

Environmental regulations and their enforcement play a critical role in reducing emissions andtheir devastating effects on humanity and the environment. However, many developing countries have large informalsectors—accounting for more than 70 percent of total employment, that operate outside government control. Thepresence of the informal sector could have detrimental consequences on the environment as informal firms do notcomply with regulations, which could jeopardize the effectiveness of environmental policies. The paper usesreduced form equations to estimate the relationship between both CO2 and non-CO2 emissions per value added and theinformal sector measured as the share of informal workers in total across countries. The estimates indicate thatemissions per value added in the informal sector are higher as opposed to in the formal sector. At the sector level,higher informality is associated with lower CO2 emissions per value added only in manufacturing and other servicessectors. In particular, a one percentage point increase in the share of informal workers in total sector employmentreduces the CO2 emissions per value added by 1.44 percent in manufacturing and 1.773 percent in services. This impliesthat the magnitude of emissions per value added in the formal sector relative to the informal sector is ambiguous.Sector-specific estimations for non-CO2 emissions yield positive significant coefficients for agriculture, trade,mining, and utilities and a negative significant coefficient for manufacturing.