The Impact of Trade Openness and Financial Development on the Environmental Pollution in South Africa: ARDL Bound test approach

Abstract

This study empirically explores the impact of trade openness and financial development on carbon dioxide emission in South Africa. It utilized the time series data covering the period between 1980 and 2023. Unit root test based on ADF and PP were conducted and the results revealed the mixture of stationarity as some of the variables were stationary at level I(0) others at first difference I(1)which is suitable in our estimation technic. ARDL bound testing approach to cointegration was used as a main tool of data analysis. Bound test result confirms a long run cointegration among the variables. Negative and significant error correction term was obtained which indicate a speed of adjustment of the model back to the equilibrium. From the ARDL long run result environmental pollution was found to be positively dependent on trade openness. The implication is that any further expansion in trade openness will keep increasing the amount of pollution in the form of carbon dioxide significantly. On another vein financial development was found to be negatively impacting on carbon dioxide emission. The interpretation is that any further advancement in financial sector will keep lowering the carbon dioxide emission in the economy. The study therefore
recommends that meaningful foreign trade policies should be put in place which discourages the importation of pollution ridden facilities. Where necessary, stringent measures should be applied to those who pollute beyond minimum pollution threshold. It is also recommend that financial sector development such as in the area of R&D which help in lowering pollution should be encouraged and ensured.