Examining the Nonlinear Dynamics of Trade Openness and Environmental Quality in Organization of Islamic Cooperation Countries

Abstract

This research examines the influence of trade openness on environmental quality in Organization of Islamic Cooperation countries from 1990 to 2023, focusing on various environmental variables. The study employs a novel approach using the nonlinear autoregressive distributed lags model to address issues of homogeneity and heterogeneity in data analysis. It utilizes different carbon dioxide proxies to assess environmental quality, introducing an innovative variable tailored to emerging nations. By creating an index and employing Principal Component Analysis, our findings highlight that environmental pollution in developing countries typically exhibits an Inverted-U curve relationship with carbon dioxide levels. The nonlinear autoregressive distributed lags analysis reveals a strong positive correlation between carbon dioxide emissions, trade openness, environmental technology innovation, and economic growth. Additionally, this study explores nonlinearities previously undetected, uncovering some decisions that might have been misguided. The results confirm the presence of an Inverted-U-shaped Environmental Kuznets Curve when using carbon dioxide as an environmental indicator in less affluent nations. The study concludes with a robust argument advocating for continued policies of economic openness, energy sector reforms, and increased use of renewable energy in developing countries. Such strategies are essential for these nations to utilize additional financial resources effectively to tackle environmental challenges.