Firms, International Trade, and the Environment in Pakistan

According to the World Trade Organization (WTO, 2021), international trade—including the production and transportation of manufactured goods—accounts for 20 to 30 percent of global greenhouse gas (GHG) emissions. This study examines the relationship between firms, international trade, and the environment, focusing specifically on Pakistan. Beyond transportation, international trade influences emissions through production via various channels, such as scale, technique, and composition effects. Although some of these channels have the potential to reduce emissions, the overall effect has often resulted in a net increase. Using firm-level data from Punjab, we investigate the impact of two significant trade policy changes on emissions from production in Pakistan’s textile sector: the termination of the Multi-fibre Arrangement (MFA) in 2005 and the Pakistan-China Free Trade Agreement (FTA) in 2006. Emission levels and intensity were higher in the post-2005 period, particularly for the spinning sector. However, emission levels and intensity were lower for exporters to destinations other than China during the same period.
Notably, emission levels and intensity peaked in 2005 compared to 2000 and 2010. While Pakistan’s reliance on fossil fuels has been reduced due to hydroelectric power generation, the country still faces electricity shortages. Payments to power plants and petroleum imports to fuel them have strained government budgets and foreign exchange reserves.
Renewable energy sources, such as solar power, offer significant potential to reduce the environmental footprint of Pakistan's exports. In an upcoming randomized controlled trial (RCT), we aim to explore the role of information provision in incentivizing small and medium firms in the textile and food & beverage processing sectors to adopt solar energy.