Causal Economic Interactions between CO2 Emissions and Economic Growth

Abstract

The environmental penalties of trade openness and foreign direct investment (FDI) got significant consideration in the current era. In this article, we aim to explore the impact of causal interactions of CO2 emission with FDI and trade openness on the economic growth of Pakistan's economy. The data are based on the period from 1972 to 2019. The Fully Modified OLS (FMOLS) cointegration procedure is used to gauge out the optimal long-run effects of these interactions on economic growth. The outcomes of cointegration regression show that the control variables; domestic investment, labor force and targeted variables CO2 emission, trade openness, FDI are having long-run significant relations with economic growth. The interaction terms, CO2 emission with trade openness and CO2 emission with FDI are showing positive relation to economic growth, but the interaction term of CO2 emission with FDI is not demonstrating a significant long-run relationship with economic growth. However, the second interaction term CO2 emission with trade openness is showing a significant positive relationship with economic growth. It indicates that a rise in foreign trade flourishes economic growth but at the cost of environmental damage.