An empirical analysis of CO2 emission in Pakistan using EKC hypothesis

Author:Khalid Ahmed
Position:School of Economics, Wuhan University of Technology, Wuhan, People's Republic of China

Purpose – The purpose of this paper is to fill the gap between energy and growth literature in Pakistan. In this regard, the authors investigated the environmental Kuznets curve (EKC) hypothesis and concluded the relationship between carbon emission and other four variables (energy consumption, economic growth, trade openness and population) at the same time. It is hoped that the policy... (see full summary)

1 Introduction

The increasingly widening environmental concerns linked to the adverse climate change impact on earth have recently persuaded world economies to use the green energy and to considerably reduce emission of CO2. According to the recent studies, the large part of carbon emission will be coming from the developing economies due to the rapid economic growth. Ever since the beginning of industrialisation in 1970s, energy consumption has largely been on the rampant which multiplied the international trade but has seemingly posited some serious threats to environment. The process of globalization, which advantages the developing countries to nurture their economies through reduced investment and trade barriers including the transfer of technology, mobilised capital and labour. However, it also shifts the burden of increasing share of environmental pollution due to the increase in energy consumption. The ongoing process of industrialization in developing countries is highly vulnerable to global climate as a whole. Subsequently, the situation seems to have been further complex because neither the environmental degradation nor the economic growth can be compromised. However, turning the simple economic growth to environmental friendly growth through technique and technological effect is likely to be a way forward.

As witnessed, most of the developing countries' growth is export oriented and larger part of their GDP comes from manufacturing sector. This trend of industrial led growth has also rapidly increased the greenhouse gases (GHG) emission trend. Owing to global externality, the adverse effects of emission has impact all around the globe. It is now growing concern both in developing and advanced countries to reduce or at least maintain this trend through effective policy reforms and multilateral agreements. However, most of the OECD countries have already started different measures towards environmental safeguard. Whereas developing countries are the most vulnerable to environmental change, are still far behind in term of measures. So, there is an immense need of policy reforms both, at country and regional level, to cop this issue. This study is also an attempt to empirically analyse Pakistan's (one of the South Asian developing countries) direct and assist policy formulation. For this purpose, environmental Kuznets curve (EKC) provides effective hypothesis for energy and growth nexus with other potential variables like which contribute to environmental degradation.

Initially, the EKC was an inverted U-shaped relationship between income and income inequality proposed by Simon Kuznets in 1955. The EKC is adopted in environmental economic literature since 1990s, the prominent researchers such as, Grossman and Krueger (1991, 1995) , Shafik and Bandyopadhyay (1992) , Lucas et al. (1992) , Panayotou (1993, 1997) , Selden and Song (1994) and Vincent (1997) found an inverted U-shape relationship between income and pollution for various pollutants. For two decades, the EKC has been hypothesized in empirical studies and various statistical tests have been used on panel and time series data techniques related to group of countries, as a single country and cross-country data as well. However, it is claimed that in order to acquire the better findings and implications, single country analysis is more suitable option because countries differ in size, geography and other economic characteristics. It is also suggested that EKC shows pollution and other variables of environmental degradation relationship with time so the EKC is a long-run phenomenon ( Lindmark, 2002 ). As a result the time, series data technique is advantageous over other techniques ( Akbostanci et al., 2009 ). In this study, we have hypothesized the EKC for energy consumption, trade, economic growth and population density. This empirical study is first of its kind which has included four major variables of environmental degradation in the case of Pakistan.

The economy of Pakistan has shown enormous growth during 2001 to 2007. Consequently, the energy consumption especially in industrial sector has added pollution to the environment, which resultantly raises concerns among domestic and international environmental protection agencies. In Pakistan, most of the CO2 emission is generated by natural gas which is almost the half of the total emission. Although Pakistan's growing economic stability witnessed handsome rise in income level, it was only compromised at the cost of further deterioration and increase in environmental pollution. During the last decade, transportation sector grew rapidly with simultaneous increase in number of individual and commercial vehicles. As per the statistics, country's per capita energy use has increased by (40 percent) from 2001 to 2007, where the total energy used by industrial and manufacturing sector has increased by (43 percent) during the year (2008-2009). Unfortunately during this span of time, the inefficient and under developed technology further exacerbated the environmental pollution in the shape of greenhouse gas emission. Higher demand and lack of technology fuelled up the environmental degradation. Over the last few decades, environmental pollution has been very serious global issue. To address this serious threat, the participation of every single country has been effective to mitigate or considerably reduce the emission level. Taking this into consideration, Government of Pakistan has been taking remedial action towards the sustainable development path from time to time. In this regard, Pakistan is also one of those countries which announced the National Environmental Policy (NEP) in 2005. The basic purpose of this initiative was to safeguard the natural environment and to ensure healthy atmosphere to the citizens. But industrial economic growth and dangerous increase in population are still considered to be two of the biggest challenges for Pakistan towards greenhouse growth. This study is undertaken in order to comprehensively test the hypothesis of EKC for both in a long-run and short-run in presence of energy consumption, trade openness, economic growth and more especially population growth rate.

2 Literature review

The work on EKC started in 1990s when world started to realize that earth average temperature increased dramatically. In order to address this serious threat to environment, Earth summit in Reo-de-Janeiro (Brazil) was held to discuss the global issue of climate change. Researchers of environmental economics hypothesized EKC which received alarmingly very serious attention rapidly. It was found that the industrialization has become threatening cause to emit excessive GHG especially CO2. Therefore, in order to assess the interconnection of variables empirically, the first relationship was made between economic growth and CO2 emission. The work was first started by the Grossman and Krueger (1991) to study the effect on NAFTA, However, EKC became more important when Shafik and Bandyopadhyay's (1992) contributed in the background study for the 1992 World Development Report stating that environmental quality improvement is essential for the sustainable development. Further, this study was followed by Shukla and Parikh (1992) , Grossman and Krueger (1995) , Shafik (1994) , Selden and Song (1995) , Jaeger et al. (1995) , Tucker (1995) , Jha (1996) , Horvath (1997) , Barbier (1997) , Matyas et al. (1998) , Ansuategi et al. (1998) , Heil and Selden (1999) , List and Gallet (1999) , Brandoford et al. (2000) , Stern and Common (2001) , Roca (2003) , Friedl and Getzner (2003) , Dinda and Coondoo (2006) , Managi and Jena (2008) , Coondoo and Dinda (2008) , Jalil and Mahmud (2009) and Akbostanci et al. (2009) .

Energy is generally considered as the driving engine of...

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