Environmental Science and Pollution Research

https://doi.org/10.1007/s11356-020-09304-z

RESEARCH ARTICLE

The impact of macroeconomic and financial development on carbon

dioxide emissions in Pakistan: evidence with a novel dynamic
simulated ARDL approach
Muhammad Imran Khan 1 & Jian Zhou Teng 1 & Muhammad Kamran Khan 1

Received: 18 April 2020 / Accepted: 13 May 2020

# Springer-Verlag GmbH Germany, part of Springer Nature 2020

Abstract
This paper has empirically explored the impact of macroeconomic and financial development on CO2 emissions by utilizing a
novel dynamic simulated ARDL model for annual time series data from 1982 to 2018 for Pakistan. The results of a novel
dynamic simulated ARDL disclosed that the growth of stock market, FDI, economic growth, and consumption of oil wield a
positive impact on CO2 emission, while domestic credit exerts a negative effect on CO2 emission both in the short and the long
run in Pakistan. The stock market development and domestic credit wield a significant influence on carbon dioxide emission in
Pakistan both in the long and the short run. FDI exerts significant impact only in the long run, while economic growth and
consumption of oil wield significant impact only in the short run on CO2 emission in Pakistan. This study opens up new visions
for the economy of Pakistan to sustain financial and economic growth by protecting environment from pollution through its
efficient national environmental policy, fiscal policy, and monetary policy.

Keywords CO2 . Stock market development . FDI . Economic growth . Oil consumption . Domestic credit . Dynamic simulated
ARDL model

Introduction oil consumption, population explosion, deforestation, trans-

Environmental degradation is no more the concern of indus-
trialized economies only, but is considered a disastrous prob-
lem across the globe. The overall increases in greenhouse gas
emission have unhealthy impacts on all countries across the
globe. Carbon dioxide is the major component of GHGs re-
sponsible for environmental degradation (Hamilton and
Turton 2002). The burning of coal, oil, and natural gases is
the most important cause of CO2 emission with deteriorating
effects on the environment (Hossain 2011; Owusu and
Asumadu-Sarkodie 2016; Sarkodie and Strezov 2018a, b).
Environmental degradations are mainly caused due to high
Responsible Editor: Nicholas Apergis
* Muhammad Imran Khan
imranhaleem1989@gmail.com
Jian Zhou Teng
tengjz270@nenu.edu.cn
1
School of Economics and Management, Northeast Normal
University, Changchun, Jilin, China
portation, defective agriculture policies, gas from industries
and autoemission, technocentrism, forest fire, and emission
of greenhouse gases (see, for example, Khan et al. 2019a, b;
Shahbaz and Sinha 2019; Shahbaz et al. 2012; Sadorsky 2010;
Minier 2009; Dasgupta et al. 2006 and Dasgupta et al. 2001).
Phenomena like forest fire and flooding are among the few
major contributing factors that speed up environmental degra-
dation in various parts of the world. These natural calamities
disturb not only the infrastructure but also sometimes cause
insuperable damage to agriculture, forest, natural resources,
and most importantly to the valuable lives of human beings.
Such disastrous events are matters of high concern for the
professionals related to the field of economics and environ-
mental sciences.
Environmental degradation is considered a universal crisis
that has threatened the whole world in general and GHG-
releasing countries, particularly due to its deteriorating im-
pacts on environmental quality. World Bank reported in
2017 that CO2 makes the most crucial part of greenhouse
gases; out of the total CO2 emission of the world, China con-
tributes 21.6%; whereas the contributions of other major states
are as follows: India 17%, the USA 14.36%, European Union

14.4%, Russia 14%, and Brazil 2.4% of the total CO2 emis-
sions. It is vital for the major GHG-emitting countries to de-
crease global CO2 emission, yet it is a difficult task because
CO2 emissions are from energy production, and economic
development can be attained by utilizing maximum available
energy. In such a case, reducing the level of CO2 emission will
adversely affect economic development, so countries are re-
luctant to compromise on their developmental goals by
lowering CO 2 emission, and therefore, environmental
degradation is the thorniest problem for many countries of
the world. The economic and industrial development of a
country is associated with strong financial system of an
economy, the growth of stock market, high inflow of FDI,
etc. According to Lau et al. (2014); Ren et al. (2014);
Shahbaz et al., (2013); Grossman and Krueger (1995);
Brock and Taylor (2010) and Khan et al. (2019a, b) growth
of stock market, oil consumption, FDI, and economic growth
wield positive impact on CO 2 emission, and these all
economic factors are the main sources for environmental
degradation. Dasgupta et al. (2001) demonstrate that the
growth of stock market increases carbon dioxide emission
due to its vital role in the enlargement of manufacturing output
of industries and energy consumption.
The growth of the stock market in emerged as well as in
emerging economies is associated with many factors, such as
industrial development, well-organized banking system,
government policies, agricultural development, political stabil-
ity, stability in exchange rates, stable oil prices, well-founded
education system, good taxation policies, monetary policy, and
fiscal policy. According to Brock and Taylor (2010), develop-
ing countries attract foreign investors through their soft envi-
ronmental policies for economic growth of the country, and
therefore, many foreign investors start their manufacturing busi-
ness in developing countries and produce large scale of produc-
tion which becomes a cause of environmental degradation.
Economic growth of emerging countries depends on the
manufacturing industries and agriculture sector, while
unplanned industrial and agriculture policies encourage
industrialists to produce on a large scale which makes the
environment suffer badly (Grossman and Krueger 1995). The
lack of new technology transportation system is another
factor of environmental degradation in developing countries
like Pakistan, whereas developed countries use new
technology in transportation system for the protection of
their environment. Transport, industrial, and agriculture
sectors are the major sources of CO2 emission (Khan and
Baig 2003). According to Shahbaz et al. (2013b), domestic
credit facility can be used as an instrument for the reduction
of environmental degradation because domestic credit helps in
the reduction of CO2 emission as it enables the industrialists to
use modern technology for production process which exerts
good impact on the quality of environment, whereas, according
to Sadorsky (2010), financial support or loan to customers
Environ Sci Pollut Res
supports them in purchasing an automobile which also in-
creases CO2 emission.
Pakistan is a classic case of what has been explained above.
The economy of Pakistan contains all the contents such as rapid
growth of stock market, high inflow of FDI, upward trend in
economic growth, high consumption of oil, and upward trend in
domestic credit. The economic growth of Pakistan showed an
upward trend from 1980 and rapid fluctuating trend from 2000
to 2018. The stock market of Pakistan witnessed its highest
level 52,876.46 index in 2017, while market capitalization
was reported as 9370.6 billion Pakistani rupees. In 2016, the
World Bank reported that due to high inflow of foreign invest-
ment from the China-Pakistan Economic Corridor projects the
growth of Pakistan is likely to rise up to 5.4% in the near future.
According to reported data of Pakistan on website of World
Bank, the GDP per capita of Pakistan is $1357 which ranks
154th in the world. During 2016–17, the total consumption of
petroleum products in Pakistan was around 26 million tons. In
the financial year 2018, the government imported 60.4 million
barrels of crude oil, while 21.8 million barrels were locally
extracted. Fifteen percent of the total requirements is met
through the indigenous crude oil, while 85% is met through
imports in the shape of refined petroleum products and crude
oil. The financial sector in Pakistan provides credit facility to all
kinds of business and industrial communities. The domestic
credit provided by financial sector showed an upward trend
from 1982 to 2018. It was reported 58% (percentage of gross
domestic product) in 2018, while the percentage was 49.46%
(% of GDP) in 1982. In Pakistan, the environmental protection
agency was founded in 1993 under the Pakistan environmental
protection agency ordinance 1983, whereas in all four prov-
inces of Pakistan, environmental protection agencies were
established in the year 1997; national environmental policy
was introduced in 2005 with the aim to conserve, protect,
and restore the environment and to bring development in the
quality of life of the people of country through sustainable
growth. However, this policy was not implemented successful-
ly in the entire country. The industrial sector in Pakistan is
increasing pollution which is affecting the environment of the
country very badly. The abovementioned reasons make
Pakistan a compelling candidate for a distinctive study to ana-
lyze the impact of the growth of stock market, FDI, economic
growth, oil consumption, and domestic credit on CO2 emission
in Pakistan; evidence with a novel dynamic simulated ARDL
model.
This empirical study makes some contributions. The inten-
tion of this paper is to analyze the influence of the growth of
stock market, FDI, economic growth, oil consumption, and
domestic credit on CO2 emission in Pakistan. This study dem-
onstrates that stock market growth, FDI, oil consumption, and
economic growth exert a positive influence on CO2 emission
in Pakistan, while domestic credit exerts negative impact on
CO2 emission in Pakistan. This study advocates for integrated
Environ Sci Pollut Res
policy selection on the impact of the growth of stock market
on CO2 emission as well as to expand clear understanding
among the relationships of FDI, economic growth, consump-
tion of oil, and domestic credit with CO2 emission in Pakistan.
This empirical study will bestow to the former studies in the
following ways. Firstly, this is the original study which has
utilized a novel dynamic simulated ARDL model in order to
empirically explore the growth of the stock market, FDI, the
economic growth, the oil consumption, domestic credit, and
their consequences on CO2 emission in Pakistan. Secondly, a
novel model used in this study can stimulate, estimate, and
plot to predict graphs of (positive and negative) changes oc-
curring in the variables automatically as well as their short-
and long-run relationships. A novel dynamic simulated
ARDL was recognized by Jordan and Philips (2018).
However, the classical ARDL model which was recommend-
ed by Pesaran et al. (2001) can only estimate the variables’
short- and long-run relationships.
The rest of this research paper is arranged as follows. Brief
literature of the earlier studies is discussed in detail in the
“Literature review” section. Data and methodology are
discussed in the “Data and methodology” section. The results
and discussion are discussed in the “Results and discussion”
section and conclusion in the “Conclusions and recommenda-
tion” section.
Literature review
Previously, researchers have done studies on the relationships of
macroeconomic development and financial variables with CO2
emission (e.g., Khan et al. 2019a, b; Shahbaz et al. 2018;
Shahbaz et al. 2013a, b, c; Sadorsky 2010; Khan and Baig
2003; Minier 2009; Mishkin 2009; Dasgupta et al. 2006;
Saboori and Sulaiman 2013a, b; Shahbaz et al. 2012; He et al.
2012; Sharma 2011; Brock and Taylor 2010; Dasgupta et al.
2001). However, the importance of this study is to portray
that how the growth of the stock market, FDI, consumption of
oil, economic growth, and domestic credit affects CO2 emissions
in Pakistan. This study has furnished detail background
and published research regarding macroeconomic factors
which affect carbon dioxide emission. This research has
evaluated the elements which have provided a ground for further
studies.
Dasgupta et al. (2001) empirically analyzed the relation-
ship of the stock market growth with CO2 emission. They
demonstrated that the growth of the stock market increases
energy consumptions, expands output of industries, alleviates
liquidity limitations for registered firms, and reduces cost of
finances which increases CO2 emission in a country. Paramati
et al. (2017) investigated the impact of the growth of stock
market, FDI, and energy consumption on CO2 emission in
G20 countries by utilizing panel Westerlund panel
cointegration test for panel data from 1991 to 2012. They
demonstrated that the growth of the stock market and inflow
of FDI reduces CO2 emission in G20 countries. According to
Sadorsky (2012), the stock market growth exerts positive in-
fluence on CO2 emission. He demonstrates that the growth of
the stock markets enhances the use of energy in emerging
economies and therefore affects the environment negatively.
According to Zhang (2011), the development of stock market
improves the growth of an economy but wields negative im-
pact on the environment due to large scale production by the
manufacturers. Khan et al. (2019b) empirically explored the
effect of FDI on CO2 emission by utilizing a novel dynamic
simulated ARDL model for data from 1971 to 2016 for
Pakistan. The empirically explored results of their study reveal
that FDI exerts a positive influence on the CO2 emission in
Pakistan. Mishkin (2009) and Shahbaz et al. (2015) suggested
that the phenomenon of the globalization is an international
issue that affects populations worldwide, socially and politi-
cally. Globalization is linked to the world’s economies direct-
ly through trade and FDI. Shahbaz et al. (2018) justified that
the phenomenon of globalization is linked with free trade,
economic growth, financial growth, and environment around
the globe. The abrupt increase in use of biofuels (traditional
energy sources) for economic activities like soaring urbaniza-
tion and industrialization has challenged the environment’s
quality everywhere. Ren et al. (2014) empirically scrutinized
the consequence of macroeconomic factors on CO2 emission
in industrial area of China by utilizing GMM estimation for
data from 2000 to 2010. Their results reveal that due to use of
old technology, misuse of resources, and unplanned policies,
FDI increases CO2 emission in the industrial sector of China.
Khan et al. (2014) conducted a study on the influence of
monetary and economic variables on CO2 emission by
utilizing data from 1975 to 2011 for South Asian countries.
According to their analyzed results, FDI exerts positive effect
on CO2 emission in South Asia. Shahbaz et al. (2013a) em-
pirically analyzed the relationships of the financial develop-
ment, the trade openness, and the economic growth with CO2
emission in Indonesia by utilizing VECM Granger causality
approach for quarterly data from 1975 to 2011. They demon-
strated that financial development wields negative impact,
while the trade openness and the economic growth wield pos-
itive impact on CO2 emission in Indonesia. According to Lau
et al. (2014), the ASEAN member countries in their endeavor
to attain the highest possible economic growth consumed
enormous amount of traditional energy resources and put a
negative pressure on the environment of the world. Alam
and Paramati (2015) empirically analyzed the influence of
the FDI, oil consumption, economic growth, internationaliza-
tion, and trade openness on CO2 emission in 18 emerging
countries of the world using data sample from 1980 to 2012.
According to their results, significant and long-run relation-
ships exist among the consumption of oil, FDI, economic

growth, and trade openness with carbon dioxide emission in
the selected 18 countries. Mikayilov et al. (2018) empirically
analyzed the impact of economic development on CO2 emis-
sion in Azerbaijan by utilizing cointegration analysis for data
from 1993 to 2013. They disclosed that economic growth
exerts a positive impact on CO2 emission in Azerbaijan.
Khan et al. (2019a) empirically analyzed the impact of the
economic growth and the consumption of oil on CO2 emission
in Pakistan by applying novel dynamic simulated ARDL
model for data from 1965 to 2015. The results of novel dy-
namic simulated ARDL model revealed that the economic
growth and the consumption of oil wield positive influence
on CO2 emission in Pakistan. Wang (2012) examined the rela-
tionship of oil consumption, gross domestic product, and CO2
emission in 98 countries of the world using data sample from
1971 to 2007. According to his analyzed results, positive rela-
tionship exists among the use of oil and the economic growth
with CO2 emissions in emerging nations. According to
Hamilton and Turton (2002); Hossain (2011); Owusu and
Asumadu-Sarkodie (2016) and Sarkodie and Strezov (2018a,
b), carbon dioxide is the major component of GHGs respon-
sible for environmental degradation, and burning of coal,
oil, and natural gas is the main cause of carbon dioxide
emission with deteriorating effects on the environment.
Shahbaz et al. (2013c) empirically investigated financial
variables on CO2 emission in South Africa by utilizing
ARDL model for data from 1965 to 2008. The results of
ARDL model of their study show that domestic credit
exerts negative impact on the CO 2 emission in South
Africa. However, according to Sadorsky (2011), financial
development wields positive influence on CO2 emission.
He demonstrates that financial growth negatively affects
the environment of a country because financial develop-
ment expands the economic growth of a country and
enables manufacturers to produce in bulk which adversely
affect the environment and help to increase carbon dioxide
emission. Sadorsky (2010) demonstrates that the efficient
banking system encourages its account holders to take loan
for purchase of automobile which also escalates CO 2
emission and thus negatively affects the environment of a
country.
Previously, researchers intensively emphasized on
issues of developed countries or larger economies like
China, Canada, the USA, and Brazil, while few researches
have been carried out on small economies like Pakistan.
The intention of this study was to fill in the gap and
empirically scrutinize the influence of the growth of the
stock market, FDI, economic growth, oil consumption,
and domestic credit on carbon dioxide emissions in
Pakistan. This research study will bestow to previous studies
in the following ways. Firstly, this is the original study which
has utilized a novel dynamic simulated ARDL model in order
to explore the negative and positive impacts of the growth of
Environ Sci Pollut Res
stock market, FDI, economic growth, oil consumption, and
domestic credit on CO2 emissions in Pakistan. Novel dynamic
simulated ARDL model was proposed by Jordan and Philips
(2018). However, the classical ARDL model which was rec-
ommended by Pesaran et al. (2001) can only estimate the var-
iables’ short- and long-run relationships.
Data and methodology
This research study has empirically analyzed the impact of
macroeconomic and financial variables on CO2 emission by
utilizing a novel dynamic simulated ARDL model for annual
time series data from 1982 to 2018 for Pakistan. We explored
the impact of the stock market growth, FDI, economic growth,
oil consumption, and domestic credit on CO2 emission. Data
were collected from the official website of World Bank and
Federal Reserve Bank. In this study, the dependent variable
was CO2 emission and measured as metric tons per capita,
while independent variables were market capitalization share
of GDP used as a proxy for stock market growth, inflow of
foreign direct investment measured as percentage of GDP, eco-
nomic growth measured as GDP per capita, oil consumption
measured as thousand barrels per day, and domestic credit pro-
vided by financial sector percentage of GDP. A novel dynamic
simulated ARDL model is used to examine for the real change
taking place in the dependent variable due to regressors (Jordan
and Philips 2018). Unit root tests were utilized for order of
integration and stationarity of the variables. All variables were
integrated at most order of I(0) and I(1) which confirms suit-
ability of a novel dynamic simulated ARDL model for this
study (Table 1). The Kwiatkowski Phillips-Schmidt-Shin,
Phillips-Person (PP 1988) and Augmented Dickey-Fuller
(Dickey and Fuller 1979) tests were also used before utilizing
dynamic ARDL simulations model. The relationships of the
variables were checked with the following equation.
CO2t ¼ β 0 þ β1 SMDt þ β2 FDIt þ β3 EGt þ β4 OILCt
þ β5 DCt þ εt ð1Þ
Error term is symbolized by εt constant is symbolized by
β0, and coefficients of the regressors are symbolized by β1 to
β5 in the abovementioned equation.
Autoregressive distributed lag bounds test
The ARDL bound test to cointegration was applied to inspect
the long-run relationship among the variables of this study.
The model applied was:
Environ Sci Pollut Res

Table 1 Variables for dynamic simulated ARDL model

S. No. Variables Symbols Unit of measurement Source

1 Carbon dioxide emission CO2 Metric tons per capita WDI (2018)
2 Stock market development SMD Market capitalization share of GDP used as a proxy Federal Reserve Bank
for stock market development
3 Foreign direct investment FDI FDI inflow percentage of GDP WDI (2018)
4 Economic growth EG GDP per capita used as a proxy for economic growth WDI (2018)
5 Oil consumption OILC Thousand barrels daily Federal Reserve Bank
6 Domestic credit DC Domestic credit provided by financial sector (% of GDP) WDI (2018)

are stationary and integrated at most order of I(0) or I(1). We

ΔCO2t ¼ φ0 þ φ1 CO2t−1 þ φ2 SMDt−1 þ φ3 FDIt−1 applied various lags for independent variables and dependent
þ φ4 EGt−1 þ φ5 OILCt−1 þ φ6 DCt−1 variable in this research study during our statistical analysis.
According to explored results of ARDL bound tests, we found
p q
þ ∑ β1 CO2t−1 þ ∑ β2 ΔSMDt−1 that cointegration persists between the variables. We applied
i¼1 i¼1 the following ARDL model for long-run relationships of var-
q q iables.
þ ∑ β3 ΔFDIt−1 þ ∑ β4 ΔEGt−1
i¼1 i¼1 p q
CO2t ¼ α0 þ ∑ σ1 CO2t−i þ ∑ σ2 SMDt−i
q q i¼1 i¼1
þ ∑ β5 ΔOILCt−1 þ ∑ β6 ΔDCt−1 þ εt ð2Þ
i¼1 i¼1 q q q
þ ∑ σ3 FDIt−i þ ∑ σ4 EGt−i þ ∑ σ5 OILCt−i
In the above equation, Δ signifies the first difference, CO2 i¼1 i¼1 i¼1

is carbon dioxide emission, SMD is stock market develop- q

ment, FDI is foreign direct investment, EG is economic
growth, OILC is oil consumption, DC is domestic credit pro-
vided by financial sector, and t−1 denotes the optimal lag
selections decided on Akaike’ information’s criterion. In the
above equation, φ and β are analyzed for variables’ long-run
relationships. The ARDL bound test null hypotheses and al-
ternative hypotheses are as follows.
þ ∑ σ6 DCt−i þ εt ð3Þ
i¼1
The long-run variation of variables is denoted by σ in the
above equation. Akaike information criterions were used to
choose appropriate lag for the individual variable of this study.
The following error correction model was utilized for short-
run ARDL model.

H0 ¼ φ1 ¼ φ2 ¼ φ3 ¼ φ4 ¼ φ5 ¼ 0
p q
H1 ¼ φ1 ≠φ2 ≠φ3 ≠φ4 ≠φ5 ≠0 ΔCO2t ¼ α0 þ ∑ β1 ΔCO2t−i þ ∑ β2 ΔSMDt−i
i¼1 i¼1

It is based on the analyzed results of F statistics to accept or q q

reject the null hypothesis. Long-run affiliations exist within þ ∑ β3 ΔFDIt−i þ ∑ β4 ΔEGt−i
i¼1 i¼1
the variables of the study when the F-statistic values are higher
q q
than the value of upper bounds, and no long relationships exist þ ∑ β5 ΔOILCt−i þ ∑ β6 ΔDCt−i þ φECTt−1
when the F-statistic values are smaller than the value of lower i¼1 i¼1

bounds (Pesaran et al. 2001). On the other hand, decision will
be indecisive if the values come between the value of upper
and lower bounds.
Autoregressive distributed lag model
The ARDL model has multiple advantages as compared with
time series models (Pesaran et al. 2001; Pesaran et al. 1999).
Classical ARDL approach can be used for data of short time
(Haug 2002). ARDL model can be utilized when the variables
þ εt ð4Þ
The short-run change is indicated by β in the above equa-
tion. The error correction term (ECT) shows short-run varia-
tion which calculates the speed of adjustment from volatility.
The normal range of ECT is from minus one to zero (− 1 to 0).
The volatility can be adjusted to equilibrium at a time when
the error correction term comes to be statistically significant
and negative. Model stability is checked over CUSUM and
CUSUMSQ (Brown et al. 1975). Stability of the model was
 Environ Sci Pollut Res

Table 2 Unit root tests

Variables ADF PP KPSS

Level 1st diff Level 1st diff Level 1st diff

CO2 − 2.4335 − 6.3826*** − 2.4473 − 6.5238*** 0.7725* 0.1143***

SMD − 0.5788 − 6.5255*** − 0.5992 − 6.4937*** 0.2310** 0.5011***
FDI − 1.8958 − 6.9502*** − 1.8724 − 7.0119*** 0.8975* 0.1310***
EG 0.3027 − 4.3712** 0.3438 − 4.2001*** 0.8899** 0.5487***
OILC − 0.9091 − 4.7732*** − 0.2963 − 4.7561*** 0.8597* 0.3714***
DC − 1.8171 − 5.5895*** − 1.9075 − 5.5878*** 0.8975* 0.3714***

*, **, *** indicates p < .05, p < .01, p < .001, respectively

confirmed through the graph of the cumulative sum control ΔCO2t ¼ α0 þ θ0 CO2t−1 þ β1 ΔSMDt þ θ1 SMDt−1
chart (CUSUM) and CUSUM of square (CUSUMSQ).
þ β2 ΔFDIt þ θ2 FDIt−1 þ β3 ΔEGt þ θ3 EGt−1

Dynamic autoregressive distributed lag simulation þ β4 ΔOILCt þ θ4 OILCt−1 þ β5 ΔDCt

model þ θ5 DCt−1 þ γ1 ECTt−1 þ εt ð5Þ

A novel dynamic simulated ARDL model was introduced by

Jordan and Philips (2018). The main objective of a novel
dynamic ARDL model was to eliminate the problems of the
old ARDL model in investigating long-run and short-run mul-
tifarious model specifications. According to Sarkodie et al.
(2019); Khan et al. (2019a); Jordan and Philips (2018), and
Khan et al. (2019b), the new dynamic simulated ARDL model
is capable of stimulating, estimating, and robotically plotting
forecast of counterfactual alterations in one regressor and its
effect on the regressand while holding the remaining indepen-
dent variables constant. This novel model can estimate, stim-
ulate, and plot to predict graphs of negative and positive
changes in the variables automatically as well as their short-
and long-run relationships. However, ARDL model intro-
duced by Pesaran et al. (2001) can only estimate the long-
and short-run relationships of the variables. All the used var-
iables of this study are stationary and integrated of most order
of I(0) and I(1) which confirms suitability of a novel dynamic
simulated ARDL model. The variables of this study meet the
criteria for a novel dynamic simulated ARDL model. The
counterfactual alterations in the regressors and their effect on
the regressand were graphically examined in this study.
According to earlier studies (e.g., Khan et al. 2019a;
Sarkodie et al. 2019; Jordan and Philips 2018, and Khan
et al. 2019b), results of a novel dynamic ARDL error correc-
tion equation are presented as below:-
Results and discussion
Table 2 reveals results of three different unit root tests. Before
using novel dynamic simulated ARDL model, it is important
to examine that the variables of the study are stationary and
integrated at most order of I(0) or I(1), otherwise the outcomes
will be invalid. Three different unit root tests such as
Kwiatkowski-Philips-Schmidt-Shin (KPSS), Phillip-Perron
(PP), and Augmented Dickey-Fuller (ADF) were used to in-
vestigate the order of integration of variables with statistical
analysis. All variables of this study are stationary and integrat-
ed at most order of I(0) and I(1) that confirm that novel dy-
namic ARDL model can be utilized.
Table 3 presents the results of AIC, SC, and HQ. The
ARDL model permits to choose different lags for independent
variables and dependent variable. According to the results of
lag length selection criteria tests, the value of AIC lag 1 is the
lowest as compared with that of SC and HQ. Therefore, we
used AIC in our research study for lag selection. The AIC, SC,
and HQ are very eminent for choosing the best lag for all type
of variables in time series data.
Table 4 indicates the results of ARDL bound tests and F
statistics in details. The ARDL bound tests were utilized to

Table 3 Criteria for lag length

Lag LogL LR FPE AIC SC HQ

0 135.7879 NA 2.42e-11 − 7.416452 − 7.149821 − 7.324411

1 325.5420 303.6065* 3.83e-15* − 16.20240* − 14.33598* − 15.55811*
2 345.6655 25.29819 1.15e-14 − 15.29517 − 11.82897 − 14.09864
Environ Sci Pollut Res

Table 4 ARDL bounds test Table 6 Dynamic ARDL simulation model

Test, statistics Value K Variable Coefficients St. Errors T-

F statistics 4.485895 5 Values
Critical bound values
Cons 0.1441 1.1773 0.1200
Significance I (0) Bound I (I) Bound
SMD 0.0181* 0.0170 1.0600
10% 2.26 3.35
ΔSMD 0.0006*** 0.0247 0.0242
5% 2.62 3.79
FDI 0.0412* 0.0111 0.3187
2.5% 2.96 4.18
ΔFDI 0.0559 0.1540 0.3629
1% 3.41 4.68
EG 0.4033 0.3572 1.1300
ΔEG 0.0044** 0.3169 0.0100
investigate the long-run relations among the variables. All the OILC 0.2455 0.3182 0.7700
variables used in this study are cointegrated as the value of F ΔOILC 0.0389* 0.1954 0.1200
statistics is higher than the upper bound value at the level of DC -0.0449*** 0.0812 -0.5500
10%, 5%, and 2.5% level of significance. ΔDC -0.2108*** 0.0762 -2.7600
Table 5 shows the results of different diagnostic statistics ECT(-1) -0.5378*** 0.1677 -3.2100
tests such as Breush-Godfrey LM, Breusch-Pagan Godfrey, R-Squared 0.7660
ARCH, Ramsey RESET, and Jarque-Bera. All these tests N 37
were utilized to inspect the model’s reliability. Breusch P-Val of F-Stat 0.0000***
Godfrey LM test reveals that there is no problem of serial Simulations 5000
correlations in the model. According to the results of the
CO2 is used for carbon dioxide emission in Pakistan, SMD is stock
Breusch-Pagan-Godfrey test and ARCH test, there is no prob- market development, FDI is foreign direct investment, EG is economic
lem of heteroscedasticity, while the Ramsey RESET test re- growth, OILC is oil consumption, and DC is domestic credit
veals that the model is used appropriately, whereas the Jarque- *p < .05
Bera test exhibits that estimated model residuals are normal. **p < .01
Table 6 reveals results of a novel dynamic simulated ***p < .001
ARDL model. The novel dynamic simulated ARDL model
can stimulate, estimate, and plot to predict graphs of negative
and positive changes occurring in the variables automatically Results of novel dynamic ARDL show that 1% increase in
as well as their short- and long-run relationships. However, stock market development has a positive and significant effect
classical ARDL can only estimate the long- and short-run on carbon dioxide emission in Pakistan up to 0.0181% in the
relationships of the variables. The empirically explored results long-run while 0.0006% in short-run. Our results are also
disclosed that the growth of the stock market, FDI, economic similar to the earlier studies of (e.g., Dasgupta et al. 2001,
growth, and consumption of oil exert positive effect on CO2 2006; Sadorsky 2010; Zhang 2011, and Paramati et al.
emission in Pakistan, while domestic credit exerts negative 2019). The foreign direct investment exerts positive impact
impact on CO2 emission in Pakistan. The stock market devel- on CO2 emission in Pakistan. According to the analyzed re-
opment and domestic credit have a significant effect on CO2 sults of this study, 1% increase in foreign direct investment
emission in the long- and short-run, whereas FDI exerts sig- positively and significantly affects carbon dioxide emission
nificant effect only in the long run, while the economic growth up to 0.0412% in the long run, whereas exerts positive and
and oil consumption have a significant effect in the short run insignificant impact up to 0.0559% in the short run in
on carbon dioxide emission in Pakistan. Pakistan. This study has confirmed findings of earlier studies
(e.g., Khan et al. 2019b; Ren et al. 2014, and Lau et al. 2014).
The empirically explored outcomes specify that economic
Table 5 Diagnostic statistics tests growth exercises positive impact on CO 2 emission in
Pakistan. Only 1% increase in economic growth positively
Diagnostic statistics tests X2 (P values) Results affects the CO2 emission up to 0.4033% in the long-run, while
Breusch Godfrey LM 0.6324 No serial correlations problem
positive and significant impact up to 0.0044% in the short-run.
Breusch-Pagan-Godfrey 0.0923 No heteroscedasticity problem
Similar results were found by Grossman and Krueger (1995);
ARCH test 0.7165 No heteroscedasticity problem
Khan et al. (2019a); and Mikayilov et al. (2018). The con-
sumption of oil wields positive influence on CO2 emission
Ramsey RESET test 0.8175 Model is specified correctly.
in Pakistan. The analyzed results show that 1% increase in
Jarque-Bera Test 0.8678 Estimated residuals are
normal. oil consumption positively affects the CO2 emission up to
0.2455% in the long run while positively and significantly

Fig. 1 Ten percent increase and 10% decrease in the stock market
development and its effect on CO2 emission in Pakistan are shown in
the above graph, while the average predicted values are indicated by the
up to 0.0389% in the short run in Pakistan. This study has
confirmed findings of earlier study (e.g., Khan et al. (2019a)).
The empirically explored results disclosed that domestic
credit wields negative influence on CO2 emission in Pakistan.
Results show that 1% increase in domestic credit negatively and
significantly affects the carbon dioxide emission up to −
0.0449% in the long run while − 0.2108% in the short run.
Our results are comparable with former studies (e.g., Shahbaz
et al. 2013a, b, c). The explored result of error correction term is
indicated by (ECT). The value of error correction terms is sig-
nificant at the level of 5%. The speed of adjustment is measured
by ECT. The empirically explored results disclosed that ECT is
statistically significant and negative. The ECT shows that 53%
volatility can be adjusted in the long run, while value of R
squared shows that 76% changes occur in the regressand are
due to the selected variables of this study.
Fig. 2 Ten percent increase and 10% decrease in the FDI and its effect on
CO2 emission in Pakistan are shown in the above graph, while the
average predicted values are indicated by the dots in the above graph.
Environ Sci Pollut Res
dots in the above graph. Seventy-five, 90, and 95% confidence intervals
are indicated in the graph by dark blue to light blue lines
A novel dynamic simulated ARDL model was introduced
by Jordan and Philips (2018). The main objective of a novel
dynamic ARDL model was to eliminate the problems of clas-
sical ARDL model in investigating long-run and short-run
multifarious model specifications. According to Sarkodie
et al. (2019); Khan et al. (2019a); Jordan and Philips (2018),
and Khan et al. (2019b), the new dynamic simulated ARDL
model is capable of stimulating, estimating, and robotically
plotting forecast of counterfactual alterations in one regressor
and its effect on the regressand while holding the remaining
independent variables constant. The basic benefit of the novel
dynamic simulated ARDL model is that it is very effective to
predict, stimulate, and estimate the graphs automatically. It
also stimulates, estimates, and plots the prediction of real var-
iations (negative and positive) occurring in the explanatory
variables and dependent variable. However, the ARDL
Seventy-five, 90, and 95% confidence interval are indicated in the graph
by dark blue to light blue lines
Environ Sci Pollut Res
Fig. 3 Ten percent increase and 10% decrease in the economic growth
and its effect on CO2 emission in Pakistan are shown in the above graph,
while the average predicted values are indicated by the dots in the above
model introduced by Pesaran et al. (2001) can only estimate
the long- and short-run relationships of the variables.
The graphs of the dynamic ARDL are usually utilized to
explore the real variation among regressors and their effect on
the regressand. A 10% increase and 10% decrease in stock
market growth, FDI, economic growth, oil consumption, and
domestic credit as well as their effect on CO2 emission were
predicted in this study. Figure 1 shows the relationships
among stock market development and carbon dioxide emis-
sion in Pakistan. The graph portrays that 10% increase or 10%
decrease in the growth of the stock market exerts positive
impact on CO2 emission in the long and short run. Figure 2
shows the relationship of FDI with CO2 emission in Pakistan.
The graph of FDI reveals that 10% increase or 10% decrease
in FDI has a positive effect on the CO2 emission in Pakistan in
the long and short run. Figure 3 shows the impulse response
plot for exploring the relationships of economic growth with
CO2 emission in Pakistan. The graph indicates that 10%
Fig. 4 Ten percent increase and 10% decrease in the oil consumption and
its effect on CO2 emission in Pakistan are shown in the above graph,
while the average predicted values are indicated by the dots in the
graph. Seventy-five, 90, and 95% confidence intervals are indicated in the
graph by dark blue to light blue lines
increases and 10% decrease in economic growth exert positive
impact on CO2 emission in Pakistan in short and long run.
Figure 4 shows the relationships of oil consumption with
CO2 emission in Pakistan. The graph indicates the real change
in the consumption of oil and its consequences on CO2 emis-
sion. A 10% increase in oil consumption exerts positive im-
pact on CO2 emission in Pakistan. However, a 10% decrease
in oil consumption also wields positive impact on CO2 emis-
sion in Pakistan both in the long and short run. Figure 5 shows
the relationships of domestic credit with CO2 emission in
Pakistan. The graph shows the real change in domestic credit
and its impact on CO2 emission in Pakistan. A 10% increase
or decrease in domestic credit wields a negative impression on
the CO2 emission in the long and short run in Pakistan.
The graphs of CUSUM and CUSUM of squares are used to
ascertain whether the coefficients are stable or not (Fig. 6).
According to the above graphs, the blue lines lie in the middle
of the red lines which show that coefficients are stable at 5%
above graph. Seventy-five, 90, and 95% confidence intervals are
indicated in the graph by dark blue to light blue lines
 Environ Sci Pollut Res

6
2

10 % Decrease in Domestic Credit

10 % Increase in Domestic Credit

4
-2 0

2
-4

0 -2
-6

0 10 20 30 0 10 20 30
Time Time

Fig. 5 Ten percent increase and 10% decrease in the domestic credit and above graph. Seventy-five, 90, and 95% confidence intervals are
its effect on CO2 emission in Pakistan are shown in the above graph, indicated in the graph by dark blue to light blue lines
while the average predicted values are indicated by the dots in the

level of the significance, and the models used in this study are
correct.
Conclusions and recommendations
Environmental degradation is no more the concern of indus-
trialized economies only, but is considered a disastrous prob-
lem across the globe. Carbon dioxide is the major component
of GHGs responsible for environmental degradation
(Hamilton and Turton 2002). Environmental degradations
are mainly caused due to high oil consumption, population
explosion, deforestation, transportation, defective agriculture
policies, gas from industries, and autoemission,
technocentrism, forests fire, and emission of greenhouse gas-
es. Phenomena like forest fire and flooding are among the few
major contributing factors that speed up environmental degra-
dation in various parts of the world. These natural calamities
disturb not only the infrastructure but also sometimes cause
insuperable damage to agriculture, forest, natural resources,
and most importantly to the valuable lives of human beings.
Such disastrous events are matters of high concern for the
professionals related to the field of economics and environ-
mental sciences. The economic and industrial development of
a country is associated with strong financial system of an
economy, the growth of the stock market, and high inflow
of FDI. The economy of Pakistan contains all the contents
such as rapid growth of stock market, high inflow of FDI,
upward trend in economic growth, high consumption of oil,
and upward trend in domestic credit. The economic growth of
Pakistan showed an upward trend from 1980 and rapid fluc-
tuating trend from 2000 to 2018. In 2016, the World Bank
reported that due to the high inflow of foreign investment from
the China-Pakistan Economic Corridor projects, the growth of
Pakistan is likely to rise up to 5.4% in the near future.
The core intention of this paper was to investigate the im-
pact of stock market development, FDI, oil consumption, eco-
nomic growth, and domestic credit on CO2 emission by

8 1.6

6
1.2
4

2
0.8

0.4
-2

-4
0.0
-6

-8 -0.4
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

CUSUM 5% Significance CUSUM of Squares 5% Significance

Fig. 6 CUSUM and CUSUM of Squares

Environ Sci Pollut Res
utilizing a novel dynamic simulated ARDL model for time
series data from 1982 to 2018 for Pakistan. Earlier, many
researchers have utilized simple ARDL in their empirical stud-
ies. Classical ARDL was recommended by Pesaran et al.
(2001). This classical ARDL model can be used only for the
assessment of long- and short-run relationships of the vari-
ables. This empirical study will bestow to the former studies
in the following ways. Firstly, this is the original study which
has utilized a novel dynamic simulated ARDL model in order
to empirically explore the impact of stock market develop-
ment, FDI, economic growth, oil consumption, and domestic
credit on CO2 emission in Pakistan. Secondly, this novel mod-
el can stimulate, estimate, and plot to predict graphs of the
changes occurring (positive and negative) in the variables au-
tomatically as well as their short- and long-run relationships.
A novel dynamic simulated ARDL was recognized by Jordan
and Philips (2018). The basic benefit of the novel dynamic
simulated ARDL model is that it is very effective to predict,
stimulate, and estimate the graphs automatically. It stimulates,
estimates, and plots the predictions of real variations occurring
in explanatory variables and their impact on dependent vari-
able. The graphs of dynamic ARDL are usually utilized to
explore the real variations among the regressors and their ef-
fect on the regressand. We utilized unit root tests for station-
arity and order of integration of the variables. The results of
the unit root test show that all variables are stationary and
integrated at most order of I(0) and I(1). The augmented
D i c k e y - F u l l e r (A D F ) , P h i l l i p s Pe r r o n (P P ) , a n d
Kwiatkowski-Phillip-Schmidt-Shin (KPSS) tests were uti-
lized with the aim to explore the linear stochastic trend of
the study variables. The results of dynamic simulated ARDL
reveal that stock market development, FDI, economic growth,
and oil consumption exert positive effect on CO2 emission in
Pakistan, while domestic credit exerts negative impact on CO2
emission in Pakistan. The stock market growth and domestic
credit have a significant impact on carbon dioxide emission in
Pakistan both in the long and short run, whereas FDI exerts
significant effect only in the long run, while economic growth
and oil consumption wield significant impact only in the short
run on CO2 emission in Pakistan.
Based on the studied results, it is stated that stock market
development, FDI, economic growth, and oil consumption
play dominant part in the environmental pollution in
Pakistan. Therefore, the government should adopt effective
policies to lessen the environmental pollution caused by these
macroeconomics factors. National environmental policy
which was introduced in 2005 in Pakistan with the aim to
conserve, protect, and restore the environment of the country
and bring improvement in the quality of life of the people of
country through sustainable development may be implement-
ed in the entire country in true letter and spirit.
The government should also encourage the financial sector
in provision of domestic credit facility on relaxed conditions
to industrialists, investors, and other business firms so that use
of new technologies for the safety of environment may be
made possible. The government should implement its national
environmental policy on manufacturing industries so that
these industries may be compelled to make their own environ-
mental corporate social responsibility policy and start efforts
for positive spillover effect within the environmental domain.
These efforts of the business firms and industries will safe-
guard the life of the people and environment from negative
externalities. This study opens up new visions for the econo-
my of Pakistan to sustain financial and economic growth by
protecting environment from pollution through its efficient
national environmental, fiscal, and monetary policies.
Acknowledgements The author would like to thank the honorable
Professor Dr Jian Zhou Teng for his valuable suggestions and comments
on this paper. The authors would also like to thank the Editor and anon-
ymous reviewers for their suggestions and comments for improvement of
this research paper. The authors acknowledge the financial support from
China’s National Social Science Research grant (16BTJ025).
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