Causality analysis of CO₂ emissions, foreign direct investment, gross domestic product, and energy consumption: empirical evidence from South Asian Association for Regional Cooperation (SAARC) countries

Over the period 1980–2016, this study looks into the causal relations between carbon dioxide (CO₂) emissions, energy consumption (EC), foreign direct investment (FDI), and gross domestic product (GDP) in five South Asian countries (Bangladesh, India, Nepal, Pakistan, and Sri Lanka). To achieve the research objectives, panel unit root tests, panel co-integration, autoregressive distributed lag model, and Granger causality tests are used. In the long run, GDP has a positive impact on CO₂ emissions, while squared GDP has a negative impact, confirming the framework of the environmental Kuznets curve (EKC) in Pakistan and Sri Lanka. However, in the short run along with these two countries, Bangladesh also confirms the EKC hypothesis. Among these five countries, Bangladesh and Nepal support the pollution haven hypothesis, but India, Pakistan, and Sri Lanka support the FDI halo hypothesis. The EC has a large positive impact on CO₂ emissions across five countries. In the long run, the Granger causality test confirms one-way causation from EC to CO₂ emissions and bidirectional causality of FDI and CO₂. These countries might encourage clean energy technology through FDI without jeopardizing GDP and environmental quality. The findings of the study provide a guideline for these countries to reduce CO₂ emissions, achieve a long-term green GDP, and combat global warming.