Causality analysis of CO2 emissions, foreign direct investment, gross domestic product, and energy consumption: empirical evidence from South Asian Association for Regional Cooperation (SAARC) countries

Abstract

Over the period 1980-2016, this study looks into the causal relations between carbon dioxide (CO2) emissions, energy consumption (EC), foreign direct investment (FDI), and gross domestic product (GDP) in five South Asian countries (Bangladesh, India, Nepal, Pakistan, and Sri Lanka). To achieve the research objectives, panel unit root tests, panel co-integration, autoregressive distributed lag model, and Granger causality tests are used. In the long run, GDP has a positive impact on CO2 emissions, while squared GDP has a negative impact, confirming the framework of the environmental Kuznets curve (EKC) in Pakistan and Sri Lanka. However, in the short run along with these two countries, Bangladesh also confirms the EKC hypothesis. Among these five countries, Bangladesh and Nepal support the pollution haven hypothesis, but India, Pakistan, and Sri Lanka support the FDI halo hypothesis. The EC has a large positive impact on CO2 emissions across five countries. In the long run, the Granger causality test confirms one-way causation from EC to CO2 emissions and bidirectional causality of FDI and CO2. These countries might encourage clean energy technology through FDI without jeopardizing GDP and environmental quality. The findings of the study provide a guideline for these countries to reduce CO2 emissions, achieve a long-term green GDP, and combat global warming.