Abstract
Pakistan's local currency has been devalued during different exchange regimes, which may substantially affect energy consumption and CO2 emissions. Therefore, this study investigates the effects of exchange rate depreciation on Pakistan's CO2 emissions and energy consumption from 1990–2018. We apply the nonlinear autoregressive distributed lag (ARDL) cointegration approach for the empirical analysis and found that exchange rate depreciation increases CO2 emissions and energy consumption in both the short and long runs. These results suggest that currency devaluation has an expansionary effect which enhances economic growth at the cost of high energy consumption and CO2 emissions. Therefore, the government needs regulations along with an exchange rate policy to control CO2 emissions. Moreover, the government should search for alternate energy resources such as renewable energy resources that meet the country's energy needs and mitigate CO2 emissions.
Highlights
The impact of exchange rate depreciation has been extensively examined with different macroeconomic variables, including gross domestic product per capita (GDP) growth, export, industrial production, current account deficit, etc
nonlinear autoregressive distributed lag (NARDL) findings and suggests that the exchange rate depreciation leads to an increase in CO2 emissions and energy consumption in the country
The production process contains energy consumption, which contributes to the CO2 emissions in the country; the exchange rate is one of the main factors influencing the aggregate productivity, exports, industrial production and trade balance, etc
Summary
The impact of exchange rate depreciation has been extensively examined with different macroeconomic variables, including gross domestic product per capita (GDP) growth, export, industrial production, current account deficit, etc. The exchange rate’s dynamics may affect energy consumption and CO2 emissions through industrial production and export expansion. Exchange rate depreciation boosts up economic activities by increasing industrial production and exports (Rodrik, 2008; Gala and Libanio, 2010), whereas production, especially in the industrial sector, requires the use of energy as an input; industrial expansion leads to increase in CO2 emissions and the energy consumption in the country. Despite the significant role of the exchange rate in CO2 emissions and energy consumption determination in the economy, very little attention is given to testing the implications of exchange rate dynamics on CO2 emissions and energy consumption. Pakistan has adopted various exchange rate systems such as fixed, manageable floating, and flexible exchange rates
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