1 Department of Managment, University of Baltistan, Gilget Baltistan, Skardu, Pakistan

2 Department of Economics, Bacha Khan University, Charsadda, Khyber Pakhtunkhwa, Pakistan


Environmental pollutants have become a dreadful problem and burning issues for the present world irrespective of a country who is responsible for it. The objective of the study is to investigate impact of financial development and institutional quality on environmental degradation. The study is based on panel data for developing and developed countries over the time of 1996-2016. For the empirical analysis fixed effect and the random effect is carried out. Results show that institutional quality, economic growth, foreign direct investment, gross primary enrolment, and industrial growth have significant positive effect on corban emissions whereas financial development, population growth, trade openness, urban population and R&D expenditures have significant negative effect on corban emissions. One percent point increase in the index of institutional quality leads towards 0.006 percent points increase in the level of CO2 emissions. One percent point increase in the economic growth lead to increase the CO2 emissions by 0.39 percent points. One percent point increase in inflows of foreign direct investment increase the level of CO2 emissions by 0.016 percent points. One percent point increase in industrial growth leads to a 0.38 percent points increase in the level of CO2 emissions. Furthermore, one percent point increase in the index of financial development leads to 0.05 percent points decrease in the level of CO2 emissions. One percent point increase in urban population leads to almost 0.05 percent points fall in the level of CO2 emissions. Finally, one percent point rise in R&D expenditures leads to decrease in the level of CO2 emissions by 0.068 percent points.

Graphical Abstract

Effect of financial development and institutional quality on the environmental degradation in developed and developing countries


  • The results of the study reveal that financial development reduce CO2 emissions in developed in developing countries whereas the institution quality increase CO2 emissions in these countries;
  • The results also support the pollution Haven Hypothesis because foreign direct investment has a significant positive effect on CO2 emissions;
  • The effect of economic growth, financial development, and the role of institutional quality on environmental degradation in developed as well as in developing countries were analyzed;
  • At this study uses the index for financial development as a proxy for financial development which incorporates the indicators of both financial market and financial institutions;
  • The index of institutional quality comprises of six indicators is also used because in recent years most of the countries comprehend the importance of institutions in tackling the pollution.


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