Decomposing the effect of trade on environment: a case study of Pakistan.

Abstract

Using time-series data from 1984 to 2019, the study examines the vigorous trade-environment relation in Pakistan. Pakistan is an interesting case study in which trade liberalization has expanded economic activity while also increasing environmental pollution during the last two decades. As a result, determining whether trade and industrial operations have contributed to environmental degradation is crucial. Our first goal is to look at how trade affects the environment in terms of scale, composition, and technique. The second step is to look into the pollution haven theory. The study uses a new approach to measuring trade openness called composite trade intensity, which differs from the traditional approach. The dynamic autoregressive distributed lag (ARDL) simulation framework, which was recently developed, was employed. The findings show that the scale impact raises CO2 emissions while the technique effect helps to lessen them, proving the existence of an environmental Kuznets curve (EKC) hypothesis. The composition impact contributes to increased pollution in the environment. Through the expansion of pollution-intensive export businesses, trade openness degrades environmental quality over the long as well as in the short term. The notion of a pollution hypothesis has also been proven. The quality of the environment deteriorates as a result of urbanization, whereas it improves as a result of good governance. Economic growth, trade openness, urbanization, and CO2 emissions have bidirectional causality, according to frequency domain causality findings. Based on our empirical findings, the study concludes that individual efforts, as well as collective efforts at the international level to reduce carbon emissions, are critical to solving the problem of environmental degradation and making the world a completely peaceful place.