This study investigates the possible environmental effects of economic openness, such as economic growth, foreign direct investment (FDI) inflows, and trade liberalization in South Asian Association for Regional Cooperation (SAARC) countries. The study employed panel autoregressive lag distribution (ARDL) model to evaluate the environmental effects of economic openness; causality test was also conducted to confirm short- and long-run causality among the variables under discussion. The results show that trade, FDI, capital, and economic growth in the long run have a positive correlation with environmental degradation in SAARC countries while FDI, capital, and trade inflows have a negative relation with CO2 emissions in the short run. Furthermore, economic growth by creating new job opportunities improved emissions also in the short run. FDI, trade, capital, and GDP have long-run causality with CO2 emissions. Bidirectional causality was found between GDP and CO2 emissions, unidirectional causality was also running from FDI inflows to economic growth, unidirectional causality running from capital to FDI and trade to capital. Finally, trade and economic growth also have unidirectional causality in the short run. This study concludes, therefore, that SAARC countries should invest in green energy and promote green trade liberalization.
Keywords: Economic growth; Environmental effects; Foreign direct investment; Trade liberalization.