An Empirical Study on the Interrelationship between Trade Openness and Carbon Emission in Bangladesh

Abstract

This study attempts to test empirically the causality between trade openness and carbon dioxide emission in Bangladesh, applying time-series econometric techniques covering 1972-2007 periods. The author tests this interrelationship in a Vector Autoregressive (VAR) framework followed by Granger causality, variance decomposition and impulse response function, to find the plausible causal relationship, direction of causality and the likely impact of one variable on the other. The VAR was tested for its stability also. The study finds inconclusive causal relationship from the Granger causality analysis. But variance decomposition and impulse response function derived through the stable unrestricted VAR model resulted in significant impact of trade liberalization on carbon emission but not vice versa. This study is important for policy makers of Bangladesh and the countries alike.