Environmental Taxes, Innovation, and Institutional Quality: Pathways to Reducing Carbon Emissions in Pakistan

Abstract

This paper explores the dynamic nature of the environmental taxes, innovation, and institutional quality in bringing down carbon dioxide emission in Pakistan between 2000 and 2024. Based on time series data with the application of the Phillips-Perron unit root test, the Johansen cointegration approach, and the Vector Error Correction Model, the study examines short-term and long-term relationships among the variables. The findings affirm that the carbon dioxide emissions, REC, research and development, domestic credit, industrialization, urban population, institutional quality, and environmental tax are all integrated together of order one. The cointegration analysis confirms that there is a long-term equilibrium relationship between these variables. The results of the Vector Error Correction Model show that the first lag of carbon dioxide emissions has a significant and negative impact on the present time emissions with a coefficient value of -0.74 and probability value of 0.009 which means a self-correcting behavior. The consumption of renewable energy presents a positive and significant short-run impact with a coefficient value of 0.03 and a probability value of 0.002 which portrays persistence in the adoption of renewable energy. Both domestic credit and industrialization have considerable negative impacts on carbon dioxide emissions with coefficients of -0.94 and probability value of 0.041, indicating that financial and industrialization development is a contributor to emission cutbacks on efficiency level. Nonetheless, the short-run impacts of research and development, institutional quality, and environmental tax are statistically insignificant but could have a long-term impact in facilitating a sustainable transition. The study concludes that environmental taxes alone are insufficient without supportive institutional and innovation frameworks. Improvement in institutional quality, making innovation the main focus by investing more in research and development, and introducing properly planned environmental tax policies will play a significant role in the realization of long-term emission reduction in Pakistan. These results are effective in guiding policymakers to ensure that the development of the economy and environmental sustainability are balanced.