Trade Openness–Carbon Emissions Nexus in Malaysia: an ARDL Approach

Shoong, Yi Jie (2026) Trade Openness–Carbon Emissions Nexus in Malaysia: an ARDL Approach. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

As climate change remains a critical global challenge; balancing economic expansion with environmental sustainability has become a primary policy concern for emerging economies. The primary objective of this study investigates the effect of trade openness on carbon dioxide (CO₂) emissions for the case of Malaysia. This study aims to determine if trade openness contributes to environmental degradation, thereby testing the validity of the “Pollution Haven Hypothesis” (PHH). The time series data spanning from the year 1990 to 2023 were utilized. Furthermore, the Autoregressive Distributed Lag (ARDL) bounds testing approach were employed to examine the long-run and short-run effects. In the short run, trade openness displays limited statistical significance. The model’s Error Correction Term (ECT) at -0.6254, indicating that 62.54% of short-run deviations are corrected toward the long-run equilibrium annually. On the other hand, this study also demonstrates a significant long-run nexus between trade openness and CO₂ emissions in Malaysia, in which 1% increase in trade activity leads to a 0.1682% rise in emissions. Moreover, these results validate the Pollution Haven Hypothesis (PHH), suggesting that increased trade activity in Malaysia is associated with higher environmental degradation. To mitigate the environmental impact of trade, Malaysia should provide financial incentives to promote the technique effect through green technology adoption, and consider a domestic Carbon Border Adjustment Mechanism (CBAM) to align with international carbon pricing and ensure sustainable trade growth