Trade, Finance, and Globalization as Drivers of CO 2 Emissions in South Asia: Evidence from Advanced Panel Econometrics

This study examines the environmental impacts of trade openness, foreign direct investment (FDI), urbanization, financial development, and economic globalization on CO 2 emissions in six South Asian economies—Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka—over the period 1990–2022. The analysis employs second-generation panel econometric techniques that account for cross-sectional dependence and heterogeneity, including the cross-sectionally augmented IPS (CIPS) and cross-sectionally augmented Dickey–Fuller (CADF) unit root tests, Pedroni and Kao cointegration tests, and robust long-run estimators such as fully modified ordinary least squares (FMOLS), dynamic ordinary least squares (DOLS), and canonical cointegrating regression (CCR). The empirical findings reveal that trade openness and FDI contribute to reducing CO 2 emissions, supporting the pollution halo hypothesis, whereas urbanization, financial development, and economic globalization exacerbate environmental degradation. Furthermore, the Dumitrescu–Hurlin panel causality test indicates bidirectional causality between CO 2 emissions and trade openness, urbanization, and financial development, while a unidirectional causal relationship runs from CO 2 emissions to economic globalization. These results highlight the complex relationship between economic integration and environmental sustainability in South Asia. The study underscores the importance of integrating environmental considerations into trade, financial, and urban development policies. It recommends the promotion of green financial reforms, environmentally responsible trade policies, and sustainable urban planning to mitigate environmental degradation and support long-term ecological resilience in the region.