The Effect of Institutional Quality on Carbon Emissions in Malaysia: an ARDL Approach

Lee, Zheng Yuan (2026) The Effect of Institutional Quality on Carbon Emissions in Malaysia: an ARDL Approach. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

Malaysia's remarkable economic transformation over the past three decades has come at a hidden cost. While industrialisation, trade liberalisation, and urban expansion have lifted incomes and improved living standards, they have also silently degraded the environment. Carbon emissions have skyrocketed from approximately 80 million tonnes in 1995 to nearly 280 million tonnes by 2020, raising an urgent and uncomfortable question whether Malaysia can continue to grow without choking on its own pollution? This study ventures beyond conventional economic analysis by investigating whether institutional quality the often-invisible hand of governance can determine the country's environmental fate. Specifically, this paper examines the influence of energy consumption, foreign direct investment, institutional quality, trade openness, and urbanisation on Malaysia's carbon emissions from 1994 to 2022, integrating the Pollution Haven Hypothesis with Institutional Theory to offer a more comprehensive understanding. Using the Autoregressive Distributed Lag (ARDL) bounds testing approach, the findings reveal a striking story. Energy consumption, foreign direct investment, trade openness, and urbanisation all exhibit positive and significant long-run relationships with carbon emissions, confirming that Malaysia is indeed vulnerable to becoming a pollution haven. Alarmingly, a 1% increase in urbanisation drives emissions up by more than 1%, exposing the environmental unsustainability of current urban development patterns. However, there is a powerful counterforce which is institutional quality. The results show that stronger governance, effective regulatory enforcement, and control of corruption significantly reduce carbon emissions overall, offering a clear policy lever for change. The error correction term of -0.5755 indicates that more than half of any short-run disequilibrium is corrected annually, suggesting that policy interventions can yield relatively swift environmental improvements. These findings challenge the conventional growth-at-all-costs mindset and call for a fundamental rethinking of Malaysia's development strategy. The government must act decisively by accelerating the renewable energy transition, attracting clean foreign investment, strengthening environmental law enforcement, and redesigning cities around public transportation rather than private cars. The window for action is narrowing, but this study proves that with the right institutions, Malaysia can still choose a greener path forward