Drivers of Carbon Emissions in a Developing Economy: The Role of Urbanization and Financial Development in Pakistan

Abstract

Aim of the Study: This study investigates the links among urbanization,  financial development, and carbon emissions in Pakistan over the time span of 1990 and 2020.

Methodology: The short-term and long-term associations between the variables are analysed by using the Autoregressive Distributed Lag (ADRL) bounds testing method.

Findings: The long-run estimates show that per capita GDP positively impacts carbon emissions, thereby indicating that economic growth in Pakistan over the period under study has continued to worsen the impact on climate change. At the same time, the square of the per capita GDP is statistically significant and positive which implies that the Environmental Kuznets Curve (EKC) hypothesis does not hold in the case of Pakistan. The estimates of financial development show a positive effect on CO2 emissions. In contrast, the area of forests and the use of renewable energy have significant and negative relation to carbon emissions indicating their positive role in the reduction of emissions. Urbanization, by contrast, has a significant positive relationship with emissions indicating the direct impacts of extensive urbanization on the environment.

Conclusion: The study concluded that financial development (FD) promotes carbon emissions in the short run while supporting emissions reduction in the long run is indicative of structural change and technology improvements. As a whole, the study is essential and provides Pakistan with the best policy opportunities where the country’s economically sustainable development goals need to be aligned with the promotion of the environmentally sustainable goals of the country’s financial system, adoption of renewable energy, afforestation, and eco-friendly urban development.