Energy Policy 39 (2011) 1857–1864

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Energy Policy
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Environmental Kuznets Curve for carbon emissions in Pakistan:

An empirical investigation
Muhammad Nasir a,n, Faiz Ur Rehman b
a
Staff Economist, Pakistan Institute of Development Economics, 44000 Islamabad, Pakistan
b
Department of Economics, Quaid-i-Azam University, Islamabad, Pakistan

a r t i c l e i n f o abstract

Article history: This study investigates the relationship between carbon emissions, income, energy consumption, and foreign
Received 7 September 2010 trade in Pakistan for the period 1972–2008. By employing the Johansen method of cointegration, the study
Accepted 11 January 2011 finds that there is a quadratic long-run relationship between carbon emissions and income, confirming the
existence of Environmental Kuznets Curve for Pakistan. Moreover, both energy consumption and foreign
Keywords: trade are found to have positive effects on emissions. The short-run results have, however, denied the
Cointegration existence of the Environmental Kuznets Curve. The short-run results are unique to the existing literature in
Environment the sense that none of the long-run determinants of emissions is significant. The contradictory results of
Energy short- and long-run give policy makers the opportunity to formulate different types of growth policies for the
two terms taking environmental issues into consideration. In addition, the uni-directional causality from
growth to energy consumption suggests that the policy makers should not only focus on forecasting future
demand for energy with different growth scenarios but also on obtaining the least cost energy. Furthermore,
the absence of causality from emissions to growth suggests that Pakistan can curb its carbon emissions
without disturbing its economic growth.
& 2011 Elsevier Ltd. All rights reserved.

1. Introduction different econometric techniques as well as different indicators for

The issue of sustainable development has shifted the attention of
the world from simple growth to environment friendly growth in the
last couple of decades. Subsequently, both environmentalists and
economists are concerned about the environmental consequences of
economic growth. This issue could not attract much attention of policy
makers who believe that economic growth is explicit to environment
and there would be no feedback from environmental deterioration to
economic expansion. However, the detrimental effects of environ-
mental deterioration appeared in several forms, affecting the eco-
nomic activities of countries in critical manners. Some of these include
the adverse effects on human health resulting in lower productivity of
labor force, and the alarming impacts of climatic changes on rainfall,
glacier melting, and sea level rise resulting in damages to agriculture
productivity and wild life. These effects were very startling for
researchers in the field of both environment and economics. As a
result, an extensive research was initiated to identify the trade-off
between economic growth and environmental degradation, which
was subsequently named as the Environmental Kuznets Curve
hypothesis (Grossman and Krueger, 1991).
As next section discusses, the Environmental Kuznets Curve
hypothesis was empirically tested for many countries using
n
Corresponding author. Tel.: +92 51 9248093; fax: + 92 51 9248065.
E-mail addresses: nasirawan84@yahoo.com (M. Nasir),
faizeconomist@yahoo.com (F. Ur Rehman).
environmental quality. One of the most widely used indicators is
carbon emissions. The results, however, are mixed for different
countries due to their diverse characteristics and, thus, the results
for one country cannot be generalized for others. This requires
separate study for each country in order to identify the main
contributors to carbon emissions in the respective country. Gener-
ally, it is believed that the larger the country in terms of population
(such as India and China) and/or economic volume (such as the
United States, Japan, and Germany), the more it will be contributing
to CO2 emissions. Thus, the large population of around 170 million, a
relatively high growth rate in the last decade, and being one of the
major contributors to emissions among the developing countries
build a strong case to conduct a separate study for Pakistan.
Unfortunately, there has not been a single country study for
Pakistan incorporating carbon emissions as an indicator for envir-
onmental degradation. This study serves to fill this gap. The
objective of this analysis, therefore, is to test empirically the
Environmental Kuznets Curve hypothesis for both short- and long-
run for Pakistan in the presence of energy consumption and foreign
trade. The period of analysis for the study is from 1972 to 2008.
The paper is organized as follows. The next section gives a brief
review of literature. An overview of the economic, energy and
environmental conditions of Pakistan is presented in Section 3.
Section 4 explains the theory and econometric specification of the
model. Section 5 describes the methodology and data. Estimation
results are discussed in Section 6. Section 7 concludes the study.

0301-4215/$ - see front matter & 2011 Elsevier Ltd. All rights reserved.
doi:10.1016/j.enpol.2011.01.025
1858 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864
2. Literature review
Economic growth and environmental degradation has been an
area of theoretical and empirical research since early 1990s, when
environmental deterioration and its consequences became more
pronounced to the world. In the field of environmental economics,
the idea of Environmental Kuznets Curve (EKC) got tremendous
attention from researchers. EKC represents the existence of a non-
linear relationship between economic growth and environmental
quality. Besides that, the use of energy in production process has
increased enormously in the second half of the last century and for
that reason, as evident from the reports of the Intergovernmental
Panel on Climate Change (IPCC), energy has become a major
contributor of CO2 emissions. Similarly, foreign trade has also been
found to be affecting environmental quality. Although this research
mainly focuses on EKC, both energy consumption and trade openness
are included as control variables in the analysis in order to avoid any
specification bias and to capture the true picture of EKC for Pakistan’s
economy. In this section, we discuss in detail the literature about EKC,
where different studies have used energy consumption or trade
openness along with economic growth to capture both short- and
long-run dynamics of environmental relapse.
The relationship between per capita GDP and environmental
quality is examined by Shukla and Parikh (1992); Grossman and
Krueger (1995); Shafik (1994); Selden and Song (1995); Jaeger
et al. (1995); Tucker (1995); Jha (1996); Horvath (1997); Barbier
(1997); Matyas et al. (1998); Ansuategi et al. (1998); Heil and
Selden (1999); List and Gallet (1999); Brandoford et al.
(2000); Stern and Common (2001); Roca (2003); Friedl and
Getzner (2003), Dinda and Coondoo (2006); Managi and Jena
(2008); Coondoo and Dinda (2008), and Akbostanci et al. (2009).
These studies use different indicators for environmental assess-
ment like CO2, SO2, NO, etc. (for air quality), and mercury, lead,
cadmium, nickel, etc. (for water quality), and urban sanitation,
deforestation, access to safe drinking water, and traffic volumes
for overall environmental quality. The above mentioned litera-
ture, however, conclude that EKC is a country and/or indicator
specific phenomenon as the results vary both across countries and
across different measures of environmental standards.
Energy is being considered as an engine of economic growth
and development. Countries having higher energy consumption
usually have higher standard of living. However, energy consump-
tion also leads to emissions of different green house gases like CO2,
SO2, etc, which affect environment in an unfavorable manner.
Therefore, researchers also started to focus on energy consumption
along with economic growth to study energy-economic growth
nexus and its contribution to environmental emissions. The litera-
ture that tested this relationship employing different econometric
techniques using different panels of countries finds that energy
consumption is an important determinant of carbon dioxide
emissions. Some of the studies in this regard include Hwang and
Gum (1991); Stern (1993; 2000); Masih and Masih (1996); Yang
(2000); Glasure (2002); Hondroyiannis et al. (2002); Ghali and El-
Sakka (2004); Wolde-Rufael (2006, 2009); Narayan and Singh
(2007); Narayan et al. (2008), and Jalil and Mahmud (2009).
Trade openness is another critical factor affecting environ-
mental quality. The impact of trade liberalization can be decom-
posed into scale, technique, and composition effects (Antweiler
et al., 2001). Mix results are found in literature regarding the
role of international trade. The studies whose results are pro-
environmental due to trade openness are Lucas et al.
(1992); Shafik and Bandyopadhyay (1992); Birdsall and Wheeler
(1993); Ferrantino (1997), and Grether et al. (2007). Nonetheless,
some studies conclude that international trade is harmful for
environment [see, for instance, Suri and Chapman, 1998; Beghin
et al., 1999; Abler et al., 1999; Lopez, 1994; Cole et al. 2000].
3. An overview of Pakistan’s economic, energy, and
environmental situation
This section briefly explains the environmental situation related to
air pollution in Pakistan in line with its relationship to growth and
energy consumption. Environmental issues of Pakistan are primarily
related with imbalanced social and economic development. From the
social side, the unchecked and unplanned growth of urbanization has
led to the creation of slums in the cities which resulted in urban
congestion and deterioration of air quality. From the economic side,
however, there has been a trade-off between economic and environ-
mental preferences. For example, the shift from conventional agri-
cultural practices to modern technological equipments proved
economically beneficial but environmentally deleterious. Similarly,
increasing the share of industrial production in the GDP was an
economically viable step but it led to increased emissions.
Two of the main factors that cause degradation of air quality
include rapidly growing transport sector and the increased
demand for energy. The dramatic increased in the number of
vehicles in addition to the use of low quality fuel has led to
significant air pollution problems in urban areas. More dangerous
is the ever expanding use of vehicles containing two stroke
engines such as motorcycles and rickshaws which are most
inefficient in burning fuel and contribute immensely to emissions.
Due to high growth rate of population the two wheeler industry is
also expanding rapidly and, since 2001, it has grown by 123.73%.
Subsequently, lead and carbon emissions became the major air
pollutants in cities. Nevertheless, except for few congested areas,
the other air pollutants such as carbon monoxide (CO), sulfur
dioxide (SO2), and ozone (O3) are still within the safe limits.
The other major reason for emissions is the rapidly growing
energy demand in domestic and commercial sectors. The high
growth rate of real GDP since 1970s (5.2% per year) has led to
increased energy demand. The energy consumption increased by
13.5% in the same period indicates the link between growth and
energy consumption. Moreover, a careful examination of the
composition of Pakistan’s energy supplies suggests that the
supply of coal during the last ten years (1998–1999 to 2007–
2008) grew by an average rate of 13.0% per annum. It is followed
by gas, crude oil, electricity, and petroleum products with per
annum growth rates of 9.5%, 7.2%, 4.7%, and 1.5%, respectively,
(Pakistan Economic Survey, 2009).
A number of empirical studies tested for causality among eco-
nomic growth, energy consumption, and carbon emissions [see, for
instance, Soytas and Sari, 2009; Halicioglu, 2009]. Moreover, Zhang
and Cheng (2009) found uni-directional causality running from
growth to energy consumption and from energy consumption to
carbon emissions. Such evidences ask for investigation of the links
between these variables. In Pakistan, per capita carbon emissions,
GDP and energy consumption have increased 3.8, 2.4, and 1.8 times,
respectively, during the period 1972–2008. In this context, the
analysis based on the objective of the study becomes very relevant.
4. Theory and econometric specification
In this section, we discuss the theoretical foundations linking
economic growth, energy consumption, and international trade
liberalization with emissions. First, the linkage between economic
growth and environmental deterioration will be discussed. Next,
the relationship of energy consumption and foreign trade with
environmental quality will be analyzed. Finally, the estimable
econometric specification will be formulated.
The association between growth and environment is symbolized
by the Environmental Kuznets Curve hypothesis. According to this
hypothesis, development along with the increase in per capita
 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864 1859

income leads to poor environmental conditions initially as both
public and private sectors want to continue this increased pace of
growth to create more jobs without giving any attention to its
environmental consequences. However, as the economy continue to
expand and high income level is maintained, people become more
conscious about the natural environment and start demanding
cleaner environment. This behavior of economy and public leads to
an inverted U-Shaped curve called Environmental Kuznets Curve.
Along with it, energy consumption and carbon emissions are
linked through the level of economic activities in the country.
Previous studies have scrutinized that the causality between
economic growth and energy consumption can be uni-directional
as well as bi-directional. Some researchers put forward that it is
energy consumption that leads to high level of economic activities
and, consequently, to high level of emissions [see, for
example, Paul and Bhattacharya, 2004; Oh and Lee, 2004; Ho
and Siu, 2007; Bowden and Payne, 2009; Belloumi, 2009]. How-
ever, a number of studies have also established that high
economic growth fosters energy consumption which may lead
to environmental deteriorations. Among these are Akarca and
Long (1980); Yu and Hwang (1984); Abosedra and Baghestani
(1989); Yu and Jin (1992); Cheng (1999); Aqeel and Butt
(2001); Altinay and Karagol (2004); Jobert and Karanfil
(2007); Karanfil (2008); Siddiqui (2004), and Soytas and Sari
(2009).
Most analysts also take trade openness as a control variable
while analyzing EKC. Trade may deteriorate or improve environ-
mental quality. As was mentioned earlier, Antweiler et al. (2001)
put forward that there are three channels through which trade
openness can lead to environmental improvement or deteriora-
tions. These include scale, technique, and composition effects. Scale
effect connotes trade liberalization leads to high level of exports of
the resident country that result in excessive economic growth.
Expansion of economic activities causes emissions to rise which is
detrimental for environment. The technique effect, on the other
hand, is believed to decrease the emissions of gases like CO2 and
improve the overall environment as import of efficient technolo-
gies because of international trade becomes a source of increased
and environment friendly production. Trade openness also creates
competition among the domestic producers and they start focusing
on the efficient production techniques to minimize per unit cost in
5. Methodology and data
The study at hand explores the relationship between economic
growth and environmental degradation specifically in the presence of
energy consumption and trade openness in the specification. For this
purpose, the Johansen maximum likelihood approach is adopted for
the analysis. Nonetheless, the use of time series data for analysis calls
for testing of stationarity of all the variables. This is an essential
requirement for avoiding the problem of spurious regression. If the
variables are non-stationary and are still used in the level form, then
the coefficients obtained as a result of Ordinary Least Square (OLS)
regression will be meaningless. One may argue that these variables
can be made stationary by differencing. However, the fear of losing
the long-run relationship among the variables prevents us from
adopting this strategy. Thus, there is a need for a methodology that
can use the variables in the level form, so that the long-run
information is contained, and can avoid the problem of spurious
regression at the same time. Cointegration approach provides the
solution to this problem. The Johansen method of cointegration is
employed to the series of same order of integration. This method is
useful in two manners: first it tests for the existence of long-run
relationship among the variables that are to be used in the analysis,
and second it provides us the long-run coefficient estimates of the
variables.
Once the long-run estimates are obtained, it is desirable to find
out the short-run estimates as well. These estimates are obtained
through the application of Vector Error Correction Method
(VECM). In contrast to the unrestricted Vector Autoregression
(VAR), the VECM is a restricted VAR where the restriction
imposed is the existence of long-run relationship among the
variables. In an error correction model, all variables in the system
are taken as endogenous in differenced form. Thus, the number of
equations in the VECM equals the number of variables in the
system. In each equation, the dependent variable depends on its
own lags, the lags of the explanatory variables, the error correc-
tion term, and on a random error term. This error or deviation
from the long-run equilibrium in previous period adjusts the
correction towards the long-run equilibrium. The VECM in five
variables case can be written as follows:
p
X q
X X
r

the production process. Finally, the composition effect means that Dlct ¼ a1 þ b1i Dlcti þ b1i D lg dpti þ b1i D lgdp2ti
i¼1 i¼1 i¼1
trade liberalization changes the industrial structure of an economy.
Due to increased trade, a country tries to specialize in the X
s X
t

production of goods in which it has a comparative advantage. If þ b1i Dlecti þ b1i Dltoti þ l1 ECt1 þ u1t ð2Þ
i¼1 p i¼1 q
the country has a comparative advantage in cleaner industries, X X X
r

then composition effect will be a source of decreasing pollution D lg dpt ¼ a2 þ b2i Dlcti þ b2i D lg dpti þ b2i D lg dp2ti
i¼1 i¼1 i¼1
emission. If, however, the advantage is in dirty industries, the
X
s X
t
results will be opposite. Hence, the composition effect can have þ b2i Dlecti þ b2i Dltoti þ l2 ECt1 þu2t ð3Þ
both positive and negative impacts. In light of above discussion, i¼1 i¼1
p
X q
X X
r
the underlying study will estimate the following:
D lg dp2t ¼ a3 þ b3i Dlcti þ b3i D lg dpti þ b3i D lg dp2ti
i¼1 i¼1 i¼1
lct ¼ a0 þ a1 lgdpt þ a2 lgdp2t þ a3 lect þ a4 ltot þ et ð1Þ
X
s X
t
þ b3i Dlecti þ b3i Dltoti þ l3 ECt1 þ u3t ð4Þ
Where lct is the natural log of per capita carbon emissions, lgdpt i¼1 i¼1
and lgdp2t are the natural log of per capita GDP and its square p q
X X X
r
term, respectively, lect is the natural log of per capita energy Dlect ¼ a4 þ b4i Dlcti þ b4i D lg dpti þ b4i D lg dp2ti
consumption, ltot is the natural log of trade openness ratio used as i¼1 i¼1 i¼1
proxy for foreign trade and et is the regression error term. The X
s X
t

variable openness ratio is constructed by dividing the sum of þ b4i Dlecti þ b4i Dltoti þ l4 ECt1 þ u4t ð5Þ
i¼1 i¼1
Pakistan’s total exports and imports of goods and services by the
p
X q
X X
r
GDP. The theory regarding Environmental Kuznets Curve suggests
Dltot ¼ a5 þ b5i Dlcti þ b5i D lg dpti þ b5i D lg dp2ti
the sign of a1 is positive whereas that of a2 is negative. Similarly, it
i¼1 i¼1 i¼1
is expected that a3 40. However, the sign for a4 is ambiguous in X
s X
t
the sense that it can either be positive or negative depending upon þ b5i Dlecti þ b5i Dltoti þ l5 ECt1 þ u5t ð6Þ
the strength of each of the effects. i¼1 i¼1
1860 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864
where uit are the serially uncorrelated random error terms.
The ECt1 in the above equations represent the cointegrating
vectors and li is the adjustment coefficient showing how much
disequilibrium is adjusted in the previous period. The size and
statistical significance of the ECt1 term is important in the sense
that it measures the extent to which error is corrected in each
short-run period to the long-run equilibrium in response to
random shocks. The adjustment coefficient l has to be statisti-
cally significant for the existence of a long-run relationship
among the variables. Since, in a VECM the variables on both sides
of the above equations are stationary, the Least Square (LS)
method can be used for estimation and all the diagnostic tests
are applicable.
An important advantage of VECM is that it can also be used to
detect causality among the variables in case of cointegrated
series. Although cointegration indicates the presence of causality,
yet the direction of causality amongst the variables is identified
through VECM. Moreover, one can also distinguish between the
short- and long-run causality with the help of vector error
correction model. Hence, using Eqs. (2)–(6) of VECM, the causality
can be examined in the following three ways:
(i) The joint significance of the lagged terms of each of the
variables on the right hand side in each equation is indicative
of impact multiplier or short-run causality running from
those variables to the dependent variables in the respective
equations. In case of more than one lag for each variable, the
F-test is used for testing the joint significance of the
lagged terms.
(ii) The significance of coefficient of error correction term in each
of the five equations is a measure of the long-run causality in
that particular equation. The t-test is used for this purpose.
(iii) Testing the joint significance of the error correction term and
the lagged terms of various variables on the right hand side
in each equation through Wald or F-test gives the joint
significance of the two sources of causality. This is also
sometimes mentioned as a measure of ‘‘strong Granger
causality’’ (Oh and Lee, 2004).
The time series data for the period 1972–2008 for the under-
lying study have been collected from various sources. Table 1
shows the summary statistics of all the variables used in the
analysis. The data for per capita carbon emissions have been
obtained from the United States Department of Energy’s Carbon
Dioxide Information Analysis Center (CDIAC) (2009). The CDIAC
collects data on emissions for 210 countries of the world. The data
for per capita energy consumption and real GDP have been taken
from World Development Indicators (WDI) for the underlying
period. The year 2000 has been used as the base year for real GDP.
The variable openness ratio has been used as proxy for foreign
trade. The data for exports and imports used in the construction
of openness ratio have also been obtained from WDI (World Bank,
2009).
Table 1
Summary statistics of data.
Carbon emissions GDP per capita
per capita (in US dollars)
Mean 0.158 447.75
Median 0.170 465.37
Maximum 0.271 651.20
Minimum 0.070 271.23
Std. dev. 0.059 114.76
Skewness 0.126  0.0381
Kurtosis 1.796 1.8802
6. Estimation results and discussion
The use of time series data necessitates the investigation of
unit roots in variables as a first step. Therefore, following Dickey
and Fuller (1979) and Philips and Perron (1988), the study uses
the augmented Dickey–Fuller (ADF) and Philips–Perron (PP) tests
in order to identify the order of integration of the variables. It is
evident from the Table 2 that all the variables are non-stationary
at level but stationary at first difference. Hence, both tests
confirmed that all the series are integrated of order one.
Once the order of integration of variables is identified, the next
step is to investigate whether or not there is a long-run relation-
ship among these variables. For this purpose, the cointegration
rank, r, of the time series has been tested by making use of both
maximum eigenvalue test and trace test of the Johansen (1988)
and Johansen and Juselius (1990) maximum likelihood method.
The maximum eigenvalue test is conducted under the null-
hypothesis of r0 ¼r against the alternative of r0 4r, whereas the
trace test is conducted under the null hypothesis of r0 rr against
the alternative of r0 4r. Before the application of cointegration
test, however, an important step is to select the optimal lag length
of underlying VAR using the conventional model selection cri-
teria. These criteria established that the optimal lag length is two.
After the lag length of the VAR is selected, Johansen test is applied
to investigate the long-run relationship among the variables. The
results of this test are illustrated in Table 3. The cointegration
rank tests based on the maximum eigenvalue statistics and trace
test statistics confirmed that there is a unique long-run relation-
ship among these series.
After the long-run relationship is established, we discuss the
long-run results of the model which are presented in Table 4.
Since the model is in log-linear form, the coefficients can also be
interpreted as elasticities. The coefficient of lgdpis 7.20 which is
positive and significant. It means that a 1% increase in per capita
real GDP will increase per capita emissions by 7.20% in the long-
run. The coefficient of lg dp2 is negative, as expected, and
statistically significant. The coefficient value of 0.56 of the square
term of the real GDP shows that, after a particular level of income,
a 1% increase in per capita real GDP will reduce the per capita
emissions by 0.56%. The turning point of per capita real income
turned out to be USD 625 compared to the highest value of USD
651 in our sample. The respective positive and negative signs of
the income and its square term together confirm the existence of
Environmental Kuznets Curve in Pakistan. Accordingly, carbon
emissions increases initially with increase in income, reaches to
its stabilization point, and then starts to decline with further
increase in income.
The sign of lec is positive and significant indicating that energy
consumption does contribute to carbon emissions in the long-run.
The coefficient value of 1.65 suggests that a 1% increase in per
capita energy consumption leads to 1.65% increase in per capita
carbon emissions. This brings forth the important finding that
besides its contribution through the stimulation of economic
GDP ^ 2 Energy consumption Trade openness
per Capita per capita index
213299.9 385.88 0.343
216574.6 397.21 0.346
424065.5 512.15 0.432
73569.49 271.07 0.277
103001.1 76.709 0.035
0.311346  0.1057 0.485
2.174059 1.5704 3.392
 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864 1861

Table 2 Table 5
Results of unit root tests. ECM results based on Johansen cointegration.

Variable ADF PP Order of Dependent variable: Dlc

integration
Level First Level First Regressors Coefficients t-Values
difference difference
D lg dp(1) 8.82 0.92
lc  2.43  8.50nnn  2.36  8.50nnn (1) D lg dp(2) 4.55 0.42
lgdp  1.23  4.43nnn  1.31  4.49nnn (1) D lg dp2(1)  0.68  0.86
lgdp2  1.38  4.37nnn  1.42  4.32nnn (1) D lg dp2(2)  0.34  0.37
lec  0.71  4.82nnn  0.73  4.90nnn (1) Dlec(1) 0.05 0.06
lto 0.106  6.22nnn  3.09  7.36nnn (1) Dlec(2)  1.15  1.69
Dlto(1)  0.02  0.12
Note: The regressions in first difference include intercept. Dlto(2)  0.07  0.54
***
Indicates rejection of null hypothesis of non-stationarity of the variable at D intercept 0.03 2.03***
1% level of significance. ecm(-1)  0.53  2.32**

Diagnostic test statistics Tests-stats p-Value

Table 3
Results of Johansen test for cointegration. Serial correlation 0.18 0.84
Normality 0.98 0.61
Rank r Trace statistics Maximum Heteroskedasticity 0.84 0.64
eigenvalue ARCH test 0.27 0.77
R-squared 0.52
r0 ¼ 0 67.60737* 37.17884**
r0 r 1 30.42853 12.03656 Note: ** and *** indicates significance of coefficients at 5% and 10% levels of
r0 r 2 18.39197 11.21792 significance.
r0 r 3 7.174047 6.669278
r0 r 4 0.504769 0.504769
from 30% in 1972 to 77% in 2008. On the other hand, the share of
Note: ** and * indicate the rejection of null-hypothesis at 5% and 10% significance primary commodities in export sector decreased from 39% to 12%
levels, respectively.
in the respective years. Thus, the export-led expansion of econ-
omy and the consequent change in composition of exported
Table 4
goods might have contributed to carbon emissions.
Long-run estimates based on Johansen cointegration.
We now turn to short-run results which are presented in
Dependent variable: lc Table 5. Since the objective of the study is to investigate the
presence of Environmental Kuznets Curve, Table 5 illustrates the
Regressors Coefficients t-Values results of Eq. (2) only in which Dlc is the dependent variable.
lg dp 7.21 2.88***
Since the optimal lag length was two, the short-run results are
lg dp2  0.56  2.43** also presented for two lags of each variable. These results seem
lec 1.65 3.13*** interesting and rather unique in existing literature in the sense
lto 0.54 3.13*** that none of the coefficients of explanatory variables is statisti-
cally significant at conventional levels of significance. This means
Note: *** and ** show significance at 1% and 5% levels of significance, respectively.
that in short-run, none of these variables contribute significantly
to per capita carbon emissions. We have also tested for joint
significance of the two lags of each variable by employing the
activities, energy consumption also contributes to emissions Wald test but found the same results. These results should not,
through some non-economic activities of, for example, domestic however, seem surprising when one looks at the US Department
and transport sectors. Together these two sectors consume almost of Energy’s Carbon Dioxide Information Analysis Center (CDIAC)
50% of total energy (Pakistan Economic Survey, 2009). (2009) ranking of the pollutant countries on the basis of per
The coefficient of lto is positive and significant implying that capita emissions for the year 2006. Pakistan has been ranked
foreign trade does contribute to carbon emissions in the long-run. 155th on that list of 210 countries.
The coefficient of openness ratio is 0.56 which suggests that a 1% The results in Table 5 advocate that the Environmental
increase in foreign trade results in 0.56% increase in emissions. Kuznets Curve (EKC) hypothesis does not hold in the short-run
This result may be justified in several ways. First, due to increase for Pakistan. The reason may be that the share of industrial
in exports, scale effect might have contributed to emissions by production, a major source of emissions, in Gross Domestic
expanding size of the economy. Secondly, the technique effect Product of Pakistan is small enough (around 25%) to contribute
may not have come into play to reduce emissions for two main significantly to environmental pollution in the short-run. On the
reasons: (1) the protection of domestic industry by the govern- other hand, the share of the service sector, a relatively less
ment from foreign competition did not force domestic producers pollutant sector, is almost 50%. In the long-run, nonetheless,
to resort to environmental friendly technologies, and (2) the these small contributions of short-run cumulate to have a
imported technologies in the form of machinery, etc. were not significant effect as was evident from the long-run results. The
environment friendly. This result also calls for investigation of same justification applies to both energy consumption and
imported technologies in the context of environmental concerns foreign trade as well. It is also evident from Table 5 that the
in future research. Lastly, composition effect may also be the error correction term is statistically significant and has expected
reason for positive effect of foreign trade on pollution. The sign. The coefficient of the error-correction term is –0.53, sug-
composition of goods in the export sector has evidenced a gesting that when per capita emission is above or below its
significant transformation as the said sector has experienced a equilibrium level, it adjusts by almost 53% within the first year.
tremendous rise in production of manufactured goods. The share Thus, the speed of adjustment towards equilibrium is significantly
of manufactured goods in export sector of Pakistan has enhanced fast in case of any shock to emission equation.
1862 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864

The ECM model also passes diagnostic and stability tests. The
results of diagnostic tests and model fit are reported in the lower
part of Table 5. R2 shows that the model is a relatively good fit.
The diagnostic tests statistics confirm the absence of serial
correlation, heteroskedasticity, and autoregressive conditional
heteroskedasticity in the model. The underlying model also
passes diagnostic test for normality. Finally, the stability of model
is also checked by applying Cumulative Sum of Recursive Residual
(CUSUM) and Cumulative Sum of Squares of Recursive Residual
(CUSUMQ) techniques based on ECM of Eq. (2). The straight lines
in both Figs. 1 and 2 represent critical bounds at 5% level of
significance. It can be observed that the plots of both CUSUM and
CUSUMQ statistics are well within the critical bounds which
substantiate stability of all coefficients in the ECM model.
After discussing long- and short-run dynamics, the next con-
cern is to inspect the direction of causality amongst these
variables. The results of causality tests based on the VEC model
are reported in Table 6. The table has three major blocks
illustrating the short-run effects, long-run effects represented by
the error correction coefficients, and the joint short-run and long-
20
10
0 carbon emission equation, error correction term and energy
-10
-20
1990 1995 2000
Fig. 1. Plot of cumulative sum of recursive residual.
1.5
1.0
0.5
0.0
-0.5
1990 1995 2000
Fig. 2. Plot of cumulative sum of squares of recursive residual.
run effects, respectively. These results are discussed in details in
the following lines.
The F-statistics for short-run significance reveals that carbon
emissions are not caused by any of the variables present in the
system. As we discussed earlier, this result also supports the one
reported in Table 5 where short-run coefficients of all the
explanatory variables are insignificant. The results further show
that GDP and GDP2 are caused only by trade openness in short-
run. Nonetheless, both GDP and GDP2 are the only variables that
cause energy consumption and trade openness. Based on these
results, we may conclude that, in the short-run, there is no
causality between growth and emissions, whereas bi-directional
causality is found between growth and trade openness. Moreover,
energy consumption is influenced by GDP and GDP2 but the
opposite is not true.
Turning now to error correction results, it is observed that
deviation from the long-run equilibrium is mainly corrected by
carbon emissions, energy consumption, and trade openness, while
GDP and GDP2 appears to be weakly exogenous. This unveils the
fact that any changes in the latter two variables that disturb long-
run equilibrium are corrected by counter-balancing changes in
the former three variables. In this context, it may be concluded
that carbon emissions, energy consumption, and trade openness
are caused by GDP and GDP2 but these two variables are not
caused by the former.
In the last part of Table 6, the results of F-statistics indicate the
significance of combined short- and long-run effects. In the
consumption are jointly significant. The same is also true for
trade openness. On the other hand, each of GDP and GDP2
combined with error correction term are statistically insignificant.
However, the significance level for rejecting the hypothesis of no
causality for both these terms is 11% only. Nevertheless, in view of
the long-run coefficient estimates obtained through cointegration
2005
and the quite low probability value for rejecting the hypothesis of
causality, one may argue that the exogenous GDP and GDP2 may
affect carbon emission in VEC model. Furthermore, none of the
joint terms in the GDP and GDP2 equations are significant which
further confirms the exogeneity of these two variables. Lastly,
both energy consumption and trade openness are caused not only
by each of GDP and GDP2 variables combined with error correc-
tion terms but also by each other.
Two very important issues arise from this analysis that call for
attention. The first issue is regarding the uni-directional causality
from growth to energy consumption. This surfaces the fact that in
Pakistan, energy policies are not growth oriented. Unfortunately,
focus of these policies has remained mainly on the shortfall
management. The energy policy responds with lags to economic
growth, thus highlighting the lack of coordination between
growth and energy policies. That is why every now and then
the country faces problems of shortfall and load management. For
2005
example, the average GDP growth rate for the period 2002–2007
was above 6.75% in Pakistan. However, during this period the

Table 6
Results of causality tests based on VECM.

Variable Short-run results (F-stats) ECT (t-stats) Joint short- and long-run results (F-stats)

Dlc Dlgdp Dlgdp2 Dlec Dlto Dlc & ECT Dlgdp & ECT Dlgdp2 & ECT Dlec & ECT Dlto & ECT

Dlc - 1.61 1.41 1.70 0.15  2.32** - 2.26 2.12 3.63** 2.41*
D lg dp 2.23 - 2.71 0.19 3.17* 0.40 1.50 - 1.92 0.13 2.29
D lg dp2 2.21 1.69 - 0.18 2.97* 0.39 2.12 1.59 - 0.12 2.14
Dlec 0.10 5.29** 4.84** - 0.08  2.13** 1.90 3.76** 3.52** - 2.40*
Dlto 0.26 2.91* 2.86* 0.46 - 2.50** 2.75* 3.04* 3.08** 2.72* -

Note: ECT represents error correction term. ** and * denote significance at 5% and 10% levels of significance, respectively.
 M. Nasir, F. Ur Rehman / Energy Policy 39 (2011) 1857–1864
installed capacity for hydroelectric and thermal power plants
remained stagnant around 6400 and 12400 MW, respectively, for
the entire period. This ultimately resulted in the shortfall of
electricity that started in 2007 and is continued till date. For
energy policies to be growth-driven, the policy makers in this
sector should not only focus on forecasting the future demand for
energy with different growth scenarios but also on obtaining the
least cost energy. The second issue is related to growth-emission
causality. The results show the uni-directional causality from
growth to emissions, meaning that Pakistan can limit the carbon
emissions without affecting the economic growth.
7. Conclusion
The prime objective of underlying study was to test the
validity of Environmental Kuznets Curve hypothesis in case of
Pakistan for the period 1972–2008. For this purpose, per capita
carbon emissions were taken as an indicator for environmental
conditions. In order to avoid specification bias, per capita energy
consumption and foreign trade, proxied by openness ratio, were
also included in the model. Johansen maximum likelihood
method was used for estimation of the model. The estimations
were made to obtain both short- and long-run results. The time
series characteristics were investigated before the estimation and
diagnostic tests were applied afterwards to validate the robust-
ness and stability of results.
The Johansen method of cointegration confirmed existence of
unique long-run relationship among the variables. The long-run
results indicate that coefficients of all the variables are statisti-
cally significant and have expected signs. Accordingly, the Envir-
onmental Kuznets Curve hypothesis holds for Pakistan in the
long-run. In addition, per capita energy consumption and foreign
trade also contribute to carbon emissions. The results for short-
run are, however, unique and interesting. None of the explanatory
variables contribute significantly to the deterioration of environ-
mental quality in the short-run. Therefore, the EKC hypothesis
does not hold in the short-run for the country and, hence, we can
conclude that EKC is only a long-run phenomenon in case of
Pakistan. The significance of coefficient of the error correction
term means that all the error is corrected by EC term only, and the
value of 0.53 of the underlying coefficient suggests that the
convergence is fast enough towards the long-run equilibrium.
The study also finds uni-directional causalities from growth to
energy consumption and carbon emission. The dissimilar results
for short- and long-run give an advantage to the policy makers to
formulate different type of policies for short-term (such as Five-
Years plan) and long-term (such as Vision-2030 and Vision-2050).
For example, the fact that Environmental Kuznets Curve exists in
long-run is encouraging in the sense that it rules out the
possibility of monotonic increase in the relationship between
per capita emissions and per capita income. As a result, growth is
not as harmful as it could have been. Conversely, significance of
per capita energy consumption calls for attention of the policy
makers regarding use of energy in unproductive environmental
enemy items, especially in transport sector. Special laws and
regulations should be observed to force and guide the public to
make their vehicles environment friendly. Similarly, in formula-
tion of the trade policies environmental concerns should also be
taken into consideration. On the other hand, the short-run results
are encouraging for two reasons. First of all, these results
substantiate the fact that, relative to its population, Pakistan is
not the major emitter of carbon dioxide as is reported by CDIAC.
Secondly, these results enable the policy makers to formulate
short-term policies regarding output and trade without worrying
about environmental issues. For example, the insignificant impact
1863
of variables on per capita emissions may allow policy makers to
go for expansionary and/or liberalized policies for shorter span of
time without being concerned about emissions as there is no
trade-off between these variables in the short-run.
The uni-directional causality from growth to energy consump-
tion highlights the fact that energy policies are not growth driven
and mostly deal with shortfall management. This attitude has to
be changed if the economy is to grow in future. For this purpose,
policy makers in this sector should not only focus on forecasting
the future demand for energy with different growth scenarios but
also on obtaining the least cost energy. Furthermore, the lack of
causality from emissions to growth suggests that Pakistan can
limit its carbon emissions without affecting its economic growth.
The underlying study also identifies some potential areas for
future research. For example, separate studies can be conducted
on disaggregate data to investigate the role of imported technol-
ogies in environmental degradation in the country. For this
purpose, net Foreign Direct Investment (FDI) and/or royalty and
licensing fees can be taken as proxies for foreign technologies.
Similarly, in the light of above results, studies may be conducted
to explore the domestic and external contributions in emissions
present in the Pakistan’s atmosphere. By doing so, the role of
domestic and foreign contributors to changes in the country’s
weather and climate conditions can be assessed. Lastly, instead of
energy consumption, energy production can be used as potential
contributor to carbon dioxide emission.
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