Testing the Pollution Haven Hypothesis in Pakistan: The Roles of Trade Openness, Foreign Direct Investment, Economic Growth, Energy Consumption, Investment, and Population in Environmental Degradation
DOI:
https://doi.org/10.54938/ijemdss.2026.05.1.704Keywords:
Pollution Haven Hypothesis, ARDL model, Energy Consumption, FDI, GDP, Trade, CO2 EmissionsAbstract
Environmental degradation has emerged as one of the most significant global challenges confronting developing economies, particularly amid increasing trade integration and foreign direct investment (FDI). The Pollution Haven Hypothesis (PHH) states that multinational companies may shift pollution-intensive production activities to countries where environmental law and enforcement are comparatively less strict. Despite extensive empirical research, evidence on the validity of the PHH remains inconclusive, particularly for Pakistan. This research examines the long-run and short-run effects of trade openness, foreign direct investment, GDP growth, energy consumption, investment, and population growth on environmental degradation in Pakistan while testing the validity of the Pollution Haven Hypothesis. Yearly data for the period 1990–2025 are sourced from the World Development Indicators (WDI). Autoregressive Distributed Lag (ARDL) is employed to estimate both long-run and short-run relationships among the variables. The empirical outcomes confirm long-run associations among the selected variables. The findings indicate that foreign direct investment (FDI) has a negative and significant influence on CO₂ emissions, suggesting that foreign investment promotes environmental quality via cleaner technologies and efficient production practices. Consequently, the findings do not support the Pollution Haven Hypothesis in Pakistan. Energy consumption, trade openness, population growth, and investment were found to have positive and statistically significant effects on CO₂ emissions, indicating that these factors contribute to environmental degradation.
In contrast, economic growth (GDP) exhibits a negative and statistically significant relationship with CO₂ emissions. These findings suggest that while trade liberalization and foreign investment contribute to economic development, they also impose substantial environmental costs under a lenient environmental regulatory framework. The study's findings recommend strengthening environmental governance, promoting green foreign investment, encouraging clean production technologies, and implementing effective carbon mitigation policies to achieve sustainable economic development in Pakistan. The findings contribute to the environmental economics literature by offering updated insights into the connection among macroeconomic variables and environmental quality.
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