*2.2. Energy Consumption and Environmental Degradation*

Economic prosperity and growth have always constituted part of the policy agenda of every country. They are of utmost importance for South Asian countries, where 40 percent of the world's poor live. Excessive population leads to excessive human activity and excessive consumption of energy, which results in CO2 emissions. Nowadays, South Asian countries can achieve improved economic growth, but at the cost of environmental degradation caused by increased consumption of natural resources [23]. Consequently, they are confronted with the dual problem of generating higher economic growth while at the same time containing the progression of environmental damage. This is particularly apparent in

South Asian countries, which are desperate to achieve higher economic growth to alleviate poverty and improve the standard of living. By comparison, developed countries face fewer challenges. Energy consumption is one of the most significant variables for rapid economic expansion, industrialization, and urbanization. This consumption in South Asian countries comes from non-renewable energy sources, in particular oil, coal, and natural gas, which in turn drive carbon dioxide emissions.

The connection between rising energy use and worsening environmental conditions is significant from the point of view of economic policy. Much research has been carried out to investigate this nexus, taking into account a variety of energy sources utilized in South Asian nations. For instance, Rahman [24] found that the use of energy had a negative long-term impact on the quality of the environment in a group of 11 Asian countries over the period 1960–2014. Similar findings were published by Dong et al. [25]. They found that using natural gas had a considerable negative influence on CO2 emissions for a panel of 14 Asia-Pacific nations between 1970–2016. In their study, Munir and Riaz [26] reviewed the data of three South Asian countries (Pakistan, India, and Bangladesh) from 1985 to 2017, and concluded that an increase in the use of gas, coal, and electricity led to a rise in CO2 emissions. Mujtaba et al. [27] demonstrate that a positive shock in oil prices is associated with an increase in energy consumption, which in turn has a positive and significant influence on CO2 emissions in India. Additionally, the research findings regarding the amount of foreign direct investment brought into this country lend credence to the pollution haven hypothesis.

It is interesting to note that the consumption of renewable energy has a positive impact on environmental quality in this region. This is something that should be taken into consideration. A significant portion of the existing body of knowledge focuses on this problem. Recent research by Anwar et al. [28] shows that the use of renewable energy sources resulted in lower carbon dioxide emissions in 15 Asian economies from 1990 to 2014. Additionally, Murshed et al. [20] found that increasing the levels of renewable energy consumption and renewable electricity outputs reduced the ecological and carbon footprints of five South Asian economies (Bangladesh, India, Pakistan, Sri Lanka, and Nepal) during the period 1995–2015. Similar results for different regions and countries were published by Shahbaz et al. [29], Ma et al. [30], Ulucak and Yucel [31], and Erdogan et al. [32].

The continued expansion of economic activity in South Asian countries along with a growing population will boost energy consumption in the following decades. It is anticipated that by 2040 the demand for energy in developing countries, including South Asian countries, will be 33 percent higher than it is today. However, the current economic growth patterns in this region, particularly in India, are environmentally unsustainable due to the country's reliance on fossil fuel-based energy consumption and imported crude oil, which significantly degrade the environment. This is especially true in India [29].

#### *2.3. Trade Openness and Environment Degradation*

The advent of globalization has made it possible for numerous nations to engage in cross-border international transactions. Since the opening of the economy in the early 1990s, a growing body of literature has investigated the impact of trade openness on the environment. This nexus is essential for policy-makers because it will assist them in achieving their goals of simultaneously accelerating economic growth and improving environmental quality. Though the nexus is significant from the point of view of policymakers, the environmental implications of trade openness have not received much attention in South Asian nations.

The impact of trade openness on pollution is described by means of the scale effect, composition effect, and technology effect. The scale effect is connected with adverse environmental consequences. It is believed that trade openness causes pollutant emissions due to increased economic activity. Trade increases production volume and energy use, which in turn causes an increase in CO2 emissions and a decline in environmental quality.

The composition effect is based on the principles of factor endowment or the Hecksher Ohlin theory. Therefore, the economy should focus on the industries with a competitive advantage. Countries with abundant labor supply should specialize in and export laborintensive products. Similarly, countries where capital is abundant should specialize in and export capital-intensive products. The South Asian nations, where there is a plentiful supply of labor, should specialize in and export goods that need much labor. Theoretically, labor-intensive industries should not cause an increase in pollution. However, several study findings indicate that trade openness has a detrimental impact on the environment of lower-income countries, where "dusty industries" are exported by industrialized nations, according to the factor endowment theory and pollution haven hypothesis [33]. The policy-makers feel that the developing and less developed nations pursue rapid economic growth to raise their living standards and combat poverty. Consequently, they are relaxing environmental rules and regulations to attract more foreign direct investors, who take advantage of lax legislation and harm the host country's environment [34].

The technological effects of trade openness bring modern eco-friendly technology that will reduce pollution. The question arises among policy-makers, researchers, and practitioners under what circumstances trade openness benefits the environment. Trade is environmentally beneficial as long as the technological effects outweigh the scale and composition effects. The empirical findings on the trade-environment nexus in developing nations are unresolved in this regard and need to be empirically tested.

There are two camps of opinion on the impact of international trade on CO2 emissions. On the one hand, it is contended that trade openness enables each nation to gain access to the world market, and in this way increase its market share. Access to global markets encourages less developed and emerging nations to import more environmentally friendly, energy-efficient, and modern technologies to replace the outdated ones. As a result, pollution levels decrease [35,36]. The studies that support a positive association between trade openness and environmental quality are Ahmed et al. [37], Antweiler et al. [38], Copeland and Taylor [39], Cherniwchan [40], Dogan and Turkekul [41], Frankel and Rose [42], Kanjilal and Ghosh [43], and Shahzad et al. [44].

On the other hand, it is claimed that trade openness adversely affects the quality of the environment as it leads to large-scale export production and the establishment of "manufacturing hubs", and what follows higher energy use and higher CO2 emissions. Foreign trade increases foreign direct investments in the industrial and logistics sectors, which are energy-based activities that lead to an increase in emissions, according to Hakimi and Hamdi [45], and Lopez [46]. Schmalensee et al. [47], and Copeland and Taylor [48] argue that growing global trade is to blame for the depletion of natural resources, which in turn results in higher CO2 emissions and worse environmental conditions. Other researchers who share the view that trade openness increases pollution include: Al-Mulali and Sheau-Ting [49], Jun et al. [34], Jalil and Feridun [50], Kellenberg [51], Managi and Kumar [52], Shahbaz et al. [53]. Because of this, we decided to verify the hypothesis that trade openness significantly impacts carbon dioxide emissions in South Asian countries.

It is interesting to note that the literature suggests conflicting and mixed impacts between trade openness and CO2 emissions, demonstrating the inconsistency of the findings. One of the reasons why these results are inconsistent is connected with different levels of economic development in the countries under study. Le et al. [54], for instance, assert that trade openness increases pollution in middle- and low-income nations while reducing it in high-income countries. Similarly, Baek et al. [55] found that trade openness negatively affected the environment's quality in less developed nations due to failure to enforce laws and regulations. On the other hand, strict environmental regulations in industrialized nations drove multinational corporation investment overseas.

Another reason for the inconsistent results is the quality of the economic policy. This is exemplified in the studies undertaken by Grossman and Krueger [56], who argue that the environmental impact of international trade depends on economic policies; Copeland [57], who highlights that trade openness improves environmental quality in the presence of

good governance; and Chang [58], who found that trade openness reduced CO2 emissions in countries with low levels of corruption while increasing CO2 emissions in countries where corruption was high.

Contrary to the findings above, some authors argue that there is no association or insignificant effect between trade openness and environmental pollution: Farhani et al. [59], Jalil and Mahmud [60], Jayanthakumaran et al. [61], and Sharma [62]. Our study will fill the literature gaps.
