Gray water and environmental externalities: International patterns of water pollution through a structural decomposition analysis

Abstract Despite regulatory measures restricting industrial and agricultural operations from pouring pollutants into lakes, streams, and rivers, around 1.1 trillion m 3 of wastewater were still disposed in waterways around the world in 2009 and this amount continues to grow. Several studies have analyzed the determinants of gray water increase at local level, but so far none has explored them in an international context to highlight the role of global value added chains and the dichotomy between developed and developing nations. In order to provide insights on the dynamics of water pollution worldwide, this paper analyzes the main drivers of gray water discharge during the 1995–2009 period and the effort on reducing gray water compared to other environmental externalities. Based on the World Input-Output Database, a structural decomposition analysis (SDA) of gray water generation shows that domestic demand for food is the main driver of gray water changes in all countries, while relocation of industrial activities to developing nations has disproportionally transferred this burden from developed countries' manufacturing industries. We highlight that while national policies should target water pollution from the agri-food sector within each country, water discharges from manufacturing sectors in global value chains need to be regulated from an international perspective. Besides the empirical evidence on water pollution drivers currently lacking in the environmental literature, this paper also introduces a novel hybrid multiplicative-additive SDA that overcomes the issue of distributing large interaction terms in standard additive models and allows simulating mitigation scenarios. It portrays the heterogeneity among sectors of how environmental abatement policies affect water and air pollution.