Analysis of the dynamics of environmental degradation for 18 upper middle-income countries: the role of financial development

Abstract

This study aims at investigating the dynamics of environmental degradation by focusing on the financial development-CO2 emissions link. In this purpose, economic growth, renewable energy consumption, trade openness and urbanization are integrated into the CO2 emissions model as other explanatory variables. In this study, 18 upper-middle-income countries with the highest growth rate in the world are examined for the period 1990-2018 by AMG method, which considers the cross-sectional dependence and slope heterogeneity. In addition, the causal linkages between variables are explored by Dumitrescu-Hurlin panel bootstrap causality technique. As a result of the study, it is found that financial development and renewable energy consumption reduce CO2 emissions. In addition, it is determined that economic growth, urbanization, and trade openness deteriorate the environmental quality. As a result of causality analysis, while one-way is found from renewable energy consumption to CO2 emissions, a bidirectional causality is observed between financial development and CO2 emissions. Empirical findings provide several policy suggestions that decrease CO2 emissions in these countries.