Exploring the Essence of Sustainability: The Dynamic Relationship Between Macroeconomic Factors and Carbon Emissions in SAARC Countries

Abstract

The exploration of sustainability in the context of the dynamic linkage between macroeconomic conditions and carbon emissions (CO 2 e) across SAARC nations reveals critical insights into how economic activities influence environmental outcomes. This study utilizes real gross domestic product (RGDP), foreign direct investment (FDI), trade openness (TO) and renewable energy consumption (REC) as predictors of carbon emissions, considering CO 2 e as the dependent variable from 1991 to 2023. To examine the long-run dynamics, the current study used panel cointegration, dynamic ordinary least squares (DOLS) and fully modified ordinary least squares (FMOLS), and for the short-run nexus, panel vector error correction model and panel Granger causality were used. Employing panel cointegration reveals a cointegrating relationship among the variables. Over time, RGDP, FDI and TO significantly reduce CO 2 emissions, whereas REC significantly reduces emissions by approximately 0.19% under FMOLS and 0.32% under DOLS for every 1% rise in renewable energy use, confirming renewable energy expansion as the region’s most reliable lever for emission reduction. Causality tests show that FDI and TO Granger-cause CO 2 e emissions unidirectionally, while GDP and REC each share bidirectional causality with CO 2 e emissions. GDP and REC also unidirectionally Granger-cause TO and GDP unidirectionally Granger-causes FDI. These results carry a clear policy message for SAARC governments: curbing carbon-intensive FDI and trade through stronger environmental screening, while simultaneously accelerating renewable energy investment and adopting binding renewable energy targets, offers the most direct path to dissociate economic expansion from carbon emissions.