Investigating the environmental Kuznets curve hypothesis with urbanization, industrialization, and service sector for six South Asian Countries: Fresh evidence from Driscoll Kraay standard error

Abstract

South Asia is the most polluted region in the world and is struggling to deal with the effects of growing CO₂ emissions and the ecological impact it has left. The region needs to identify the variables that are most effective in reducing pollution in order to achieve long-term sustainable growth. The current study aims to investigate the environmental impacts of the current and projected urbanization rate, the service sector, and the availability of natural resources to test the environmental Kuznets-curve (EKC) theory in six South Asian countries (SAARC). With cross-sectional dependence present, this research examines panel data from 1972 to 2021 using the newly developed Driscoll Kraay Standard Error (DKSE) approach. To check the robustness of DKSE estimation, the study employs a novel Cross Sectional Autoregressive Distributive Lag (CS-ARDL) method. The results of DKSE show that GDP significantly minimizes CO₂ emissions in both the short and long run. At the same time, GDP², urbanization, and the service sector increase CO₂ emissions in the South Asian region. The DKSE estimator also shows that industrialization and abundant natural resources have insignificant impacts on CO₂ emissions. Inconsistent with the EKC hypothesis, the findings show that higher economic growth leads to increased environmental pollution and CO₂ levels. Meanwhile, the CS-ARDL analysis found that GDP and industrialization reduce CO₂ emissions, while urbanization, GDP², and natural resource availability increase CO₂ emissions. This research emphasizes the need for establishing appropriate industrialization and urbanization strategies and promoting cleaner energy adoption to reduce CO₂ emissions.