The role of shadow economy to determine CO2 emission in Pakistan: evidence from novel dynamic simulated ARDL model and wavelet coherence analysis

In the race of economic development, the environment is compromising, especially in developing countries. Literature has highlighted many factors that have been causing CO2 emissions. The identification of factors behind environmental degradation is important to control them for a sustainable environment. In this regard, this study also identifies the role of the shadow economy for CO2 emission in the case of Pakistan. Furthermore, the impact of official/formal, GDP and true/actual GDP are also checked on CO2 emission function along with energy consumption and urbanization in Pakistan. The annual time series data from 1972 to 2018 is utilized. A novel dynamic autoregressive distributed lag simulation is employed to confirm the existence of cointegration. Moreover, this novel approach also estimates, stimulates, and plots to show a positive and negative change in variables on graphs. The estimated results confirm the long-run association between CO2 emission and its determinants in the case of Pakistan. A positive and significant impact of shadow, official and true GDP along with energy consumption and urbanization illustrate that shadow economy is contributing toward urbanization via huge investment in real estate that leads to higher urbanization which further increases the energy consumption particularly nonrenewable energy, natural gas, and coal consumption. Government and policymakers should introduce new controls and strengthen the existing ones to control CO2 emission via a decrease in the size of the shadow economy. Moreover, unplanned and irregular urbanization should be regular and documented to control illegal/shadow activities, hence, decreasing the nonrenewable energy consumption.