Document Type: ORIGINAL RESEARCH PAPER

Authors

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

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

Abstract

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

Highlights

  • 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.

Keywords

Main Subjects

Abid, M. (2017). Does economic, financial and institutional developments matter for environmental quality? A comparative analysis of EU and MEA countries. J. Environ. Manage., 188: 183-194 (12 pages).

Aizenman, J.; Jinjarak, Y.; Park, D., (2015). Financial development and output growth in developing Asia and Latin America: A comparative sectoral analysis: National Bureau of Economic Research. No. w20917.

Aron, J., (2000). Growth and institutions: a review of the evidence. World Bank Res. Obs., 15(1): 99-135 (27 pages).

Ayeche, M. B.; Barhoumi, M.; Hammas, M. A., (2016). Causal linkage between economic growth, financial development, trade openness and CO2 emissions in European Countries. J. Environ. Eng. Sci., 6(4): 110-122 (13 pages).

Bakhsh, K.; Rose, S.; Ali, M. F.; Ahmad, N.; Shahbaz, M., (2017). Economic growth, CO2 emissions, renewable waste and FDI relation in Pakistan: New evidence from 3SLS. J. Environ. Manage., 196: 627-632 (6 pages).

Bernauer, T.; Koubi, V., (2009). Effects of political institutions on air quality. Ecol. Econ., 68(5): 1355-1365  (11 pages).

Bhattacharya, M.; Churchill, S. A.; Paramati, S. R., (2017). The dynamic impact of renewable energy and institutions on economic output and CO2 emissions across regions. Renewable Energy. 111: 157-167. (11 pages).

Birdsall, N.; Wheeler, D., (1993). Trade policy and industrial pollution in Latin America: where are the pollution havens? Environ. Dev., 2(1): 137-149 (13 pages).

Charfeddine, L.; Khediri, K. B., (2016). Financial development and environmental quality in UAE: Cointegration with structural breaks. Renewable Sustainable Energy Rev., 55: 1322-1335. (14 pages).

Dhrifi, A., (2018). Does environmental degradation, institutional quality, and economic development matter for health? Evidence from African Countries. J. Knowl. Econ, 1-16 (16 pages).

Egbetokun, A.; Atta-Ankomah R.; Jegede, O.; Lorenz, E., (2016). Firm-level innovation in Africa: overcoming limits and constraints. Tayl.Fran, 6(2): 161-174 (14 pages).

Foster, V.; Bedrosyan, D., (2014). Understanding CO2 emissions from the Global Energy sector.  World Bank, Washington DC.

Gokmenoglu, K.; Ozatac, N.; Eren, B. M., (2015). The relationship between industrial production, financial development and carbon emissions: The case of Turkey. J. Financ. Econ., 25: 463-470 (8 pages).

Grossman, G. M.; Krueger, A. B., (1995). Economic growth and the environment. Q. J. Econ., 110(2): 353-377 (25 pages).

Halkos, G. E.; Tzeremes, N. G., (2013). Carbon dioxide emissions and governance: A nonparametric analysis for the G-20. Energy Econ., 40: 110-118. (78 pages).

Jalil, A.; Feridun, M., (2011). The impact of growth, energy and financial development on the environment in China: a cointegration analysis. Energy Econ., 33(2): 284-291 (8 pages).

Jorgenson, A.K., (2003). Consumption and environmental degradation: A cross-national analysis of the ecological footprint. Soc. Problems. 50(3): 374-394 (20 pages).

Karimzadeh, M.; Taheri Bazkhane, S.; Kamali Dalfardi, H.; Barakchian, M. R., (2014). Studying the relationship between financial development and emissions of Carbon Dioxide in Iran: Using Autoregressive-Distributed Lag. Resis. Econ., 8(2): 96-107 (12 pages).

Kuznets, S., (1955). Economic growth and income inequality. Am. Econ. Rev, 45(1): 1-28 (28 pages).

Le Quéré, C.; Andrew, R. M.; Friedlingstein, P.; Sitch, S.; Pongratz, J.; Manning, A. C.; Boden, T. A., (2017). Global carbon budget 2017.Earth Syst. Sci. Data Discussion. 1-79 (79 pages).

Levin, A.; Lin, C.-F.; Chu, C.-S. J., (2002). Unit root tests in panel data: asymptotic and finite-sample properties. J. Econ., 108(1): 1-24 (24 pages).

Li, K.; Lin, B., (2015). Impacts of urbanization and industrialization on energy consumption/CO2 emissions: does the level of development matter?Renewable sustainable Energy Rev., 52: 1107-1122 (15 pages).

Martínez-Zarzoso, I.; Maruotti, A., (2011). The impact of urbanization on CO2 emissions: evidence from developing countries. Ecol. Econ., 70(7): 1344-1353 (10 pages).

Moghadam, H. E.; Lotfalipour, M. R., (2014). Impact of financial development on the environmental quality in Iran. Chin. Bus. Rev.., 13(9), 537-551 (15 pages).

North, D. C. (1990). A transaction cost theory of politics. J. Theor. Politics. 2(4): 355-367 (12 pages).

Olson, M., (1996). Distinguished lecture on economics in government: big bills left on the sidewalk: why some nations are rich, and others poor. J. Econ. Perspect., 10(2): 3-24 (21 pages).

Özokcu, S.; Özdemir, Ö., (2017). Economic growth, energy, and environmental Kuznets curve. Renewable Sustainable Energy Rev., 72: 639-647 (9 pages).

Ozturk, I.; Acaravci, A., (2013). The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy. Econ., 36: 262-267 (6 pages).

Sahli, I.; Rejeb, J. B., (2015). The Environmental Kuznets Curve and corruption in the MENA region. Procedia Soc. Behav. Sci., 195: 1648-1657 (10 pages).

Sanstad, A. H.; Roy, J.; Sathaye, J. A., (2006). Estimating energy-augmenting technological change in developing country industries. Energy Econ., 28(5-6): 720-729 (9 pages).

Sehrawat, M.; Giri, A.; Mohapatra, G., (2015). The impact of financial development, economic growth and energy consumption on environmental degradation: Evidence from India. J. Environ. Qual., 26(5): 666-682 (17 pages).

Shahbaz, M., (2013). Does financial instability increase environmental degradation? Fresh evidence from Pakistan. Econ. Model., 33: 537-544 (8 pages).

Shahbaz, M.; Hye, Q. M. A.; Tiwari, A. K.; Leitão N. C., (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable Sustainable Energy Rev., 25: 109-121 (13 pages).

Shahbaz, M.; Tiwari, A. K.; Nasir, M., (2013). The effects of financial development, economic growth, coal consumption and trade openness on CO2 emissions in South Africa. Energy Policy, 61: 1452-1459 (8 pages).

Soytas, U.; Sari, R., (2009). Energy consumption, economic growth, and carbon emissions: challenges faced by an EU candidate member. Ecol. Econ, 68(6): 1667-1675 (9 pages).

Sulaiman, C.; Abdul-Rahim, A.; Mohd-Shahwahid, H.; Chin, L., (2017). Wood fuel consumption, institutional quality, and forest degradation in sub-Saharan Africa: Evidence from a dynamic panel framework. Ecol. Indicators. 74: 414-419 (6 pages).

Svirydzenka, K., (2016). Introducing a new broad-based index of financial development: I.M.F., Working paper No. 16/5 (10 pages).

Tamazian, A.; Rao, B. B., (2010). Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Econ, 32(1): 137-145 (9 pages).

Tamazian, A.; Chousa, J.P.; Vadlamannati, K.C., (2009). Does higher economic and financial development lead to environmental degradation: evidence from BRIC countries. Energy Policy. 37(1): 246-253 (8 pages).

Ulman, S. R.; Bujancă, G. V., (2014). The corruption influence on the macroeconomic environment. Empirical analysis on countries development stages. J. Financial Econ., 16: 427-437 (11 pages).

Varoudakis, A.; Tiongson, E. R.; Pushak, T., (2007). Public finance, governance, and growth in transition economies: Empirical evidence from 1992-2004. The World Bank.

You, W.-H.; Zhu, H.-M.; Yu, K.; Peng, C., (2015). Democracy, financial openness, and global carbon dioxide emissions: Heterogeneity across existing emission levels. World Dev., 66: 189-207 (19 pages).

Yuxiang, K.; Chen, Z., (2011). Financial development and environmental performance: evidence from China. J. Dev. Econ., 16(1): 93-111 (19 pages).