The Effect of International Trade on Carbon Emissions: Evidence from Pakistan

Abstract

The relationship between trade openness and environment is highly debated issues since from the expansion of international trade. This paper takes time series data from 1980 to 2010 period to investigate the causal relationship between trade liberalization and Air quality in Pakistan using Granger causality test. The research finds out that causality running from FDI in pollution promoting dirty technology towards CO₂ emissions in Pakistan. Foreign direct investment  also cause the scale effect which is the increase in the size of production due to trade expansion and that again cause the CO₂ concentration in the Air which result in the harming the Air quality which ultimately worsen the environment. Bi-directional causality has been also examined among the openness of trade and CO₂ emission, technology effect and foreign direct investment net inflow. The one way causality was analyzed only between FDI and composition effect which indicate that FDI affect the composition effect which is taken from the decomposition of trade effects. This composition also causes by the technology which available due to openness of trade strategy in Pakistan.

Keywords: Trade liberalization ,carbon emissions ,Pairwise causality