Can environmental quality spread through institutions?

Spatial relationships are known phenomena in ecological studies that refer to the relationships between certain variables observed in different localities. Different mechanisms have been suggested to explain this phenomenon, such as the pollution displacement hypothesis, foreign direct investment, international trade, and strategic response of countries to transboundary pollution flows. This paper develops a new mechanism in the sense that environmental quality of countries spreads spatially to their neighbors through the spillover of the institutional quality of countries. To test this hypothesis, a panel data model is constructed that estimates the impact of the institutional quality of countries and their neighbors on their CO2 emission intensity of energy use using data for 129 countries over the period 1980–2007. The findings prove the existence of this mechanism at the global and regional levels.