Re-thinking Progress: How Financial Growth, Renewable Energy, and Innovation Shape Pakistan's Carbon Emissions

Abstract

The long-term viability of development strategies hinges on achieving a harmonious balance between economic growth and environmental protection. The current research aimed to explore the relationships of financial development (FD), renewable energy consumption (REC), and technological innovation (TI) with carbon emissions (CO₂) in Pakistan. The Dynamic Ordinary Least Square (DOLS) method was employed to analyze the relevant data for the time period (1991-2023) that was derived from World Development Indicators (WDI) and World Intellectual Property Organization (WIPO). The results of Fully Modified Ordinary Least Square (FMOLS) and Canonical Correlation Regression (CCR) confirmed the robustness of the model. The results of the analysis indicated that the FD was positively related to CO₂, indicating that a 1% increase in FD led to 0.10% increase in CO₂ emissions (statistically significant at the 1% level). The REC had a significant positive impact on environmental quality, that is, decreasing CO₂ emission by 1.44% (statistically significant at the 1% level). Whereas, the TI had a negative effect on environmental quality. A 1% increase in TI contributed to a 0.093% increase in CO₂ emissions (statistically significant at the 5% level). It was concluded that financial institutions supported industrial expansion along with increased consumption of energy-intensive goods and implementation of carbon-intensive projects. Innovations appeared to be focused on energy-intensive sectors rather than green technologies. This might be due to a dirty innovation bias, measurement issues, or delayed environmental benefits. It is recommended that the government should incentivize green energy initiatives and eco-friendly technologies to mitigate the harmful effects of environmental degradation in Pakistan. A shift towards renewable energy sources should be promoted to stabilize the environment in the long run.