DECOUPLING ECONOMIC GAINS FROM ENVIRONMENTAL COSTS: EVIDENCE FROM PAKISTAN

Abstract

One of the biggest challenges in sustainable development is separating economic growth from environmental degradation. In the agricultural export sector, this challenge manifests as the attainment of domestic value-added increases while concurrently diminishing domestic embodied CO2 emissions. This paper is the first to systematically measure and decompose the domestic environmental cost of Pakistan's agricultural exports using the Multi-Regional Input-Output (MRIO) model combined with Structural Decomposition Analysis (SDA), covering the period 2000 to 2014 with projections extended to 2025. We define domestic environmental cost as the ratio of domestic embodied CO2 emissions to domestic value added in agricultural exports - a metric that directly captures whether decoupling is occurring. Our results reveal that Pakistan's average domestic environmental cost stands at 1.498 CO2 kt per million USD, the highest among all major agricultural exporters examined, and approximately 1.54 times higher than China's average of 0.973. Although a declining trend is observed, confirming partial decoupling over the sample period, the pace of decoupling is significantly slower than comparable economies. The SDA decomposition identifies the CO2 emission coefficient as the primary driver of cost reduction, while the value-added rate and export structure changes counteract this improvement. Cross-country decomposition with China reveals that the emission coefficient and intermediate input structure are the main factors explaining Pakistan's environmental cost disadvantage. Scenario analysis confirms that structural reform of intermediate inputs rather than emission technology alone offers the greatest long-term potential for decoupling. These findings carry important implications for Pakistan's agricultural trade policy, energy transition strategy, and the green development agenda under the China-Pakistan Economic Corridor (CPEC).