Financial Development, Foreign Direct Investment, and CO? Emissions in Pakistan: Evidence from an Asymmetric Analysis

Abstract

This paper examines the asymmetric contribution of financial development, foreign direct investment (FDI) and economic growth to CO2 emissions in Pakistan. This study is based on the annual data of 2000-2024 and employs the Nonlinear Autoregressive Distributed Lag (NARDL) model. The short run results show that positive financial development shocks raise the level of emissions, whereas negative shocks lower the level of emissions substantially, as expected. The growth of the economy enhances the emission of CO2 and the GDP2 proves the Environmental Kuznets Curve (EKC) hypothesis. FDI is not significant in the short and long term. The results indicate that Pakistan needs to improve sustainable financial policies, increase green investments, and cleaner growth policies. The policy recommendations focus on green finance, the use of renewable energy, and controlling investment on high emission intensity projects.