NEXUS BETWEEN TRADE LIBERALIZATION, ROLE OF FINANCIALISATION AND ENVIRONMENTAL DEGRADATION: USING STIRPAT MODEL IN PAKISTAN’S ECONOMY

Abstract

This paper examines the trade liberalization, financialization and environmental degradation in Pakistan through STIRPAT (Stochastic Impacts by Regression on Population, Affluence, and Technology) model. The study will determine the significant economic and financial factors of the CO₂ emissions in the Pakistan economy that is rapidly developing. Since Pakistan is susceptible to climate change as it is ranked in the top positions in the German watch Climate Risk Index (2020), it has become more important to appreciate the forces behind the deterioration of the environment. The variables that are included in the study are economic growth, industrialization, energy consumption, financial development as well as trade openness in order to assess their short and long run effects on CO₂ emission. The empirical results show that the financial development, energy consumption, globalization and industrial growth play a major role in the increase of carbon emission in both the short run as well as the long run. Furthermore, the findings support a high causal association at a long run between financial sector variables including stock market capitalization, credit to the private sector, and access and environmental degradation by the financial markets. These results indicate that the economic and financial development of Pakistan although a prerequisite to growth has brought about increased environmental strains. The implications that are suggested by the policy include the necessity to improve energy efficiency, the establishment of renewable energy sources, and the incorporation of green financial practices. Pakistan needs to embrace green financial reforms and emphasize on low carbon economic growth in order to meet its commitments in the COP21 and reduce ecological damages.