Carbon Emissions in Pakistan: The Role of Financial Development and Foreign Direct Investment

This study examines the impact of financial development and foreign direct investment (FDI) on CO2 emissions in Pakistan, utilizing annual data from 2000 to 2022 obtained from the World Development Indicators. Using the Nonlinear Autoregressive Distributed Lag (NARDL) model, the results reveal that in the short run, positive changes in financial development (FD+) significantly increase CO2 emissions, while negative changes (FD-) reduce them. FDI also contributes to higher CO2 emissions, whereas renewable energy consumption effectively reduces emissions, highlighting its environmental benefits. In the long run, positive changes in financial development decrease CO2 emissions, though the relationship is not statistically significant, while negative changes increase emissions. These findings underscore the critical role of renewable energy in mitigating environmental degradation. Policymakers are encouraged to carefully manage financial development and FDI to balance economic growth and environmental sustainability.