The Role of Environmental Taxation in Mitigating CO₂ Emissions: Testing the Environmental Kuznets Curve Hypothesis is South Asian Economies

Abstract

Recent study analyzes the impact of environmental policy on CO₂ emissions in Pakistan, Bangladesh, India and Sri Lanka for 2000–2024 using an extended version of the Environmental Kuznets Curve (EKC) model.  This analysis is about whether environmental taxation is effective in reducing environmental degradation, but also considers the effects of economic growth, foreign direct investment (FDI), population density and industrialisation.  A set of diagnostic and econometric procedures is performed to examine the balanced panel data, which includes the tests for cross sectional dependence, slope heterogeneity, CADF and CIPS unit-root tests, Westerlund cointegration test, and the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) estimator.  The positive and significant relationship between economic growth and CO2 emissions, and the negative and significant relationship between the squared GDP term and CO2 emissions are in line with the inverted-U shape of the EKC theory. Shorthorn and long-term environmental policy can be found to reduce CO2 emissions, which suggests the potential for an effective environmental taxation policy. However, higher emissions are brought about by higher level of FDI, population density and Industrialization, and the population density has the highest long run coefficient. Hence size of the error-correction term is large and minus, suggesting that there is a stable relationship across time and about 528.8% of disequilibrium is corrected in a single period. The results are relevant to the importance of environment tax, cleaner technology, sustainable urban design, lesser FDI, and low carbon industrial development for sustainable economical growth in the South Asian region.