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Experiential EKC: Trade Openness for Optimal CO2 Emission in SAARC Region

Jayasooriya, Sujith (2019): Experiential EKC: Trade Openness for Optimal CO2 Emission in SAARC Region.

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Impact of globalization in terms of environmental degradation over trade liberalization is renowned strong theoretical underpinning in the literature. Nevertheless, testing Environmental Kuznets model of trade liberalization is not adequately estimated to provide pragmatic evidences for optimal environmental policy designs. Besides identifying the Environmental Kuznets Hypothesis (EKH); testing for (i) CO2 emission and economic growth (ii) CO2 emission and trade openness, (iii) changes of emissions over simulated trade openness under the experiential Environmental Kuznets Curve (EKC) was estimated using dynamic panel data estimation with Instrumental Variable-Generalized Methods of Moments. The paper used innovative approach to measure the scale effect after performing series of approximations of EKH relationships, a non-linear relationship between percentage changes of CO2 emission with respect to the simulated trade openness, are predicted using Monte Carlo simulation experiments. Data from WDI of World Bank was used to model the EKC relationships. The results provides evidences that the impacts are considered as the magnifier effect, as this experimentation shows that the increase of trade openness, under these economic situations need to increase 400% to reach the maximum % of CO2 emissions to decrease gradually. The South Asian Association for Regional Corporation (SAARC) countries cannot increase the trade openness for eight times from current level of trade openness to minimize the emissions, thus high emission rates with increase of trade openness can’t be avoided without incorporation of environmental policy instruments. This study also verified that when trade liberalization eliminates subsidies, inducing less environmental friendly effects in the production processes, both trade flows and quality of the environment improves. Finally, the study produced evidences for policymakers to consider the regulatory effect of the trade liberalization in the SAARC region. The paper recommends movements towards the free trade intimidate the optimal environmental standards. Thus, optimal trade openness is essential for amending the SAARC regional trade agreement for environmental effects with regulations for minimizing the environmental impacts and sharing the common benefits among partners for designing the open economic policies.

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