Carbon dynamics: A holistic analysis of FDI,trade liberalization,urbanization,economic growth,and effects on CO 2 emissions in South Asia

Abstract

In recent years, South Asian nations have experienced robust economic growth, prompting concerns among policymakers about the sustainability of this growth due to rising pollution emissions. This study conducts an objective assessment of the impact of key variables, such as trade liberalization, economic growth, foreign direct investment inflows, and urbanization, on environmental outcomes across selected economies of South Asia from 1990 to 2022. To describe cross-sectional dependencies in the dataset, panel cointegration techniques are employed alongside cross-sectionally augmented autoregressive distributed lag (CS-ARDL) models. For added robustness, dynamic ordinary least squares (DOLS) and fully modified ordinary least squares (FMOLS) techniques are utilized to investigate the long-term coalition among the variables. The study integrates first- and second-generation panel methods to improve the depth and reliability of the analysis by addressing methodological limitations. The pragmatic results reveal that trade liberalization, FDI inflows, economic growth, and urbanization increase CO₂ emissions by 0.392%, 0.354%, 0.275%, and 0.429%, respectively. Dumitrescu and Hurlin (D–H) causality tests show a unidirectional causal link from trade liberalization to environmental degradation. Additionally, a bidirectional causal link is observed between environmental deterioration and both FDI inflows and urbanization in South Asian countries. To mitigate environmental impact, these nations should evaluate foreign investment conditions and enhance technology transfer from foreign enterprises. Furthermore, implementing trade-related policies to reduce CO₂ emissions is imperative.