Modelling International Trade, Foreign Direct Investment, and Carbon Emission Nexus in Nigeria: A Reconsideration of the Pollution Haven Hypothesis

Abstract

We model the impact of international trade and FDI on carbon emission in Nigeria to test the pollution haven hypothesis between 1981 and 2020 using the ARDL approach. The study utilises the Lee-Strazicich (L-S) unit root test to check for possible breaks since the traditional unit root test treats breaks as unit roots. The L-S result indicates the presence of structural breaks between 2006 and 2017. Additionally, we check for cointegration using the ARDL-bounds test and causal nexus using the Toda-Yamamoto granger causality test. The cointegration result suggests the existence of a long-run relationship among the variables, while the causality test indicates that FDI causes carbon emission, whereas international trade and carbon emission influence each other. The ARDL estimates show that international trade and FDI reduce carbon emissions in the short run. However, international trade and FDI positively affect Nigeria's carbon footprint in the long run, supporting the long-run polluter haven. Including an institutional variable, government regulation positively impacts short-run CO2 emissions while slowing CO2 discharge in the long run. The moderation effect shows that FDI and regulatory quality interaction increases Co2 emissions in the short run, but over the long run, pollution declines. International trade and regulatory interaction reduce carbon emissions in the short and long run. The study advises that Nigeria should attract green supporting FDI, encourage trade in green technology and strengthen regulatory quality to checkmate pollution activities of industries. JEL Codes: F18, F21, K20, F24, Q53