Trade Openness, Renewable Energy, and Environmental Outcomes: Evidence from Pakistan

This study examines the dynamic, long-run and short-run relationships between trade openness, renewable energy consumption, and environmental degradation in Pakistan from 1970 to 2023. Employing an autoregressive distributed lag (ARDL) bounds-testing approach, the study analyzes the key determinants of per-capita CO2 emissions. Long-run findings indicate that trade openness reduces emissions significantly, whereas a greater share of renewable energy, unexpectedly, correlates with increased CO2 emissions. This counterintuitive outcome is attributed to the inclusion of traditional biomass in renewable data and the carbon-intensive nature of new energy infrastructure development. Furthermore, economic growth and foreign direct investment both contribute to environmental degradation, supporting the presence of the Environmental Kuznets Curve and pollution-haven phenomena in their early phases. Short-run analysis indicates that the emission-reducing effects of trade liberalization are immediate, whereas the benefits of renewable energy exhibit a significant lag. The error correction model implies a fast, overshooting return to long run equilibrium. These findings highlight the complex, context-dependent nature of the environmental-economic nexus in a developing nation and underscore the necessity for nuanced policy that accounts for both immediate and delayed impacts. The analysis suggests a need to exploit effects of trade liberalization through stricter environmental standards, improve strategies for the use of renewable energy resources that actually reduce emissions, and carefully screen foreign investments to be consistent with `green' needs, in order to reconcile tensions between economic prosperity and environmental protection.