Energy, Economic Growth and Foreign Direct Investment on Environmental Degradation in South Asian Countries

Abstract

Environmental degradation has become a major concern across South Asia; this study examines the impact of energy consumption, economic growth (GDP), and foreign direct investment (FDI) on environmental degradation measured by CO2 emission in four South Asian countries: Bangladesh, India, Pakistan, and Sri Lanka from 1972 to 2022 with reference to Environment Kuznets Curve (EKC). Using secondary data from the World Development Indicators, the study employed various econometric techniques. First, it conducted unit root tests to assess the stationarity of the variables. Next, panel cointegration tests were used to determine long-run relationships. Descriptive statistics provided a summary of the data, while three panel ARDL estimation techniques (PMG, MG, and FE) were employed to estimate the models. Finally, a heterogeneous panel causality test was conducted to investigate causal relationships between the variables. The findings indicate that Energy consumption and GDP exhibit a significant positive impact on greenhouse gas emissions in the short run. While in the long run, Energy consumption and FDI has a positive significant impact, whereas GDP squares (representing the inverted U-shaped EKC) exert a negative significant impact, validating the EKC. Furthermore, based on these findings, several tailored environmental welfare improvement related policies and promoting sustainable development recommendations are suggested. Bangladesh and Pakistan, near the EKC turning point, could benefit from policies promoting green growth and sustainable development, and should focus on mitigating the environmental impact of industrialization. In contrast, India may require more aggressive environmental regulations and policy interventions to accelerate its transition to the downward-sloping phase of the EKC. Sri Lanka should focus on mitigating the environmental impacts of FDI while fostering sustainable economic growth and sustaining environmental gains as income levels rise, while encouraging the exploration of alternative economic indicators like the Human Development Index (HDI) and green GDP for future work.