The South Asian Association for Regional Cooperation (SAARC) countries are actively participating in the world trade. SAARC countries are engaged in both inter- and intra–industry trade. The volume of intra-industry trade is increasing in the SAARC region. Does increase in the intra-industry trade a source of environmental externalities in the region? This is a question, which is addressed in this thesis. Accordingly; this thesis investigates the trade and environment relationship by making use of the new trade theory. The new trade theory refers to the imperfect competition, increasing returns to scale, choice of variety and specialization in a limited range of production of differentiated goods. By using the new trade theory, this study thus examines the trade induced environmental effect that is disintegrated into three components; namely, scale effect, technique effect and selection effect. It is the selection effect that differentiates the effect of inter-industry trade from the effect of intra-industry trade on the environment. Earlier empirical studies generally ignored the selection effect due to frequent use of overall trade induced environmental composition effect in the trade and environment literature. Trade induced environmental composition effect emphasizes on environmental effect of trade due to change in factor intensity. But this thesis use trade induced environmental selection effect instead of trade induced environmental composition effect. The environmental selection effect is the change in emission level due to change in the selection of differentiated products, while trade induced environmental selection effect is the change in emission level due to change in the selection of differentiated products as result of trade liberalization. In the absence of data on differentiated products, empirical research studies suggest that number of firms can be used as a proxy for differentiated products. This study uses number of listed firms instead of differentiated products. The environmental scale effect is a change in the level of emission due to change in the scale of production; on the other hand trade induced environmental scale effect is a change in the level of emission due to change in the scale of production by virtue of trade liberalization and the environmental technique effect, shows the relationship between income and emissions; while trade induced environmental technique effect, shows the relationship between income and emissions due to trade liberalization. Disintegration of trade induced environmental effects is thus an integral part of this study. Another important element of this thesis is policy recommendations on the basis of empirical analysis. Supervisor:- Dr. Zafar Mahmood