Towards Connecting Carbon Emissions with Asymmetric Changes in Economic Growth: Evidence from Linear and Nonlinear ARDL Approaches

The well-established emissions-growth debate relies on the symmetric nexus between CO2 emissions and economic growth, thereby ignoring a fundamental component of macro economy in the form of asymmetric relation. This paper considers how CO2 emissions respond asymmetrically to changes in economic growth. While utilizing both linear and nonlinear time series approaches for an environmentally exposed country, Pakistan over the period 1971–2018, we find convincing evidence that CO2 emissions rise more rapidly during negative shocks to economic growth than increase during economic expansions. Thus, contrary to what has previously been reported, the effect is strong as holds both at short run and long run. This is partly due to the increase in informal sector as GDP declines. Our estimated results show that accounting for the shadow economy results a higher magnitude of CO2 emissions due to decrease in economic growth, thus question the traditional symmetric decoupling of economic growth and CO2 emissions. The estimated results are robust to alternative estimators such as fully modified least squares (FMOLS) and dynamic OLS (DOLS). Thus, the findings of this study call for a re-thinking on climate policy design that rarely pays attention to the aforementioned outcomes due to fall in economic growth.