The Impact of Financial Sector Development on Environmental Degradation (Carbon Dioxide Emission) in Pakistan

Mr. Inamullah and Abdur Rehman

Journal of Economic Impact, 2022, vol. 4, issue 3, 244-251

Abstract: The main purpose of this research article is to determine the impact of financial sector development on environmental degradation in Pakistan. The study used the time series data of the financial sector development on environmental degradation (CO2 emission) in Pakistan during the period of 1974-2018. Due to the nature of the times series data, the Augmented Dicky Fuller test is used to detect the level of stationarity in the data. Mixed orders of the stationarity in the data are reported, and the Auto Regressive Distributed Lag model is the best technique to provide efficient results. The ADF result clearly shows that the variables except for Y, Y2, and Y3 are stationarity in the first order, while the mentioned variables are stationarity at a level. And Trade openness is stationary at first difference. The bound test results (the F-statistic value is 5.208 that exceeded the values of upper bounds value, i.e., 3.28 at a 5% significance level. Therefore, the co-integrational relationship is confirmed for the model of the study at a 5% significance level. The model depicts the impact of Financial Sector Development on environmental degradation regarding CO2 emission. It was found that FSD negatively affected environmental degradation in Pakistan in both the long and short run during the period from 1974 to 2018. The impact of PG, EC and FDI is positive and statistically significant in the long run. The impact of TO on CO2 emission is negative and significant in the long run. On the other hand side, negative shock can produce harmful effects on the environment. A positive and significant relationship is reported regarding economic growth and CO2 emission. The impact of Population growth, Financial Development Index, Trade Openness, Energy Consumption, and Economic growth is also positive and significant to CO2 emission. It is quite evident from the detailed examination of the above model. This study concluded that financial sector development efficiently contributes to long-term and short-term environmental degradation. Financial sector development negatively and significantly affects environmental quality as measured by CO2. Therefore, it is concluded that the financial sector can be used as a policy tool to reduce CO2 emission in Pakistan based on the data set from 1974-2018.

Keywords: Augmented Dicky Fuller test; Auto regressive distributed lag model; Carbon dioxide; Environmental degradation; Financial sector development; Population growth (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:adx:journl:v:4:y:2022:i:3:p:244-251

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