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Revisiting environmental Environmental

degradation
degradation and economic growth and economic
growth
nexus using autoregressive
distributed lag approach
Monica Singhania and Neha Saini Received 31 October 2019
Revised 3 May 2020
Faculty of Management Studies, University of Delhi, New Delhi, India 14 June 2020
24 June 2020
Accepted 1 July 2020
Abstract
Purpose – The paper attempts to revisit the nexus between economic growth, carbon emissions, trade
openness, financial effectiveness and FDI for a sample of seven developed and developing countries using
curvilinear relationship as per environmental Kuznets curve (EKC) hypothesis over long term.
Design/methodology/approach – The authors determine the unit root properties of variables (using
Clemente–Monta~ nes–Reyes unit root test with double mean shifts and AO model and augmented Dickey–
Fuller test) for structural breaks at different levels. Autoregressive distributed lag (ARDL) and error correction
model (ECM) methodology was used to estimate long- and short-run parameters among the selected variables
in sample countries from 1965 to 2016. Vector error correction (VEC) and Granger causality approach was used
to determine the direction of causality.
Findings – The authors confirmed long-run relationship among the variables and highlighted high
economic growth and energy consumption as the main causes of environmental degradation. While in India
financial development and FDI inflows depict a negative association with environmental sustainability,
however, such relationship was positive in the United Kingdom (UK), which is often considered as a
benchmark for policymakers. The authors’ findings were in agreement with existing research insights in
reporting FDI and financial development as the major contributors towards (unsustainable) sustainable
environment through emissions in case of (developing country like India) developed country like UK. For
other sample countries (China, Brazil, Japan, South Africa, United States of America (USA)), the authors’
model failed to capture financial development and FDI as significant contributors of carbon emissions.
However, unidirectional causality running from energy to carbon emission was observed leading to the
policy adoption of incentivizing alternative energy-based resources to increase energy efficiency across the
energy value chain.
Research limitations/implications – Manufacturing with renewable energy, in collaboration with private
and foreign players, under an institutional framework is desirable. Policy instruments including mandatory
administrative controls, economic incentives and voluntary schemes that promote energy efficiency building
blocks need to be established. A sound legal system for implementing technological innovation, financial
subsidy incentives, interest-free loan programmes and development of financial sector supports creation and
thriving of energy efficient units, often a perquisite for accelerated development.
Originality/value – By undertaking a comparative analysis, the authors address the research gap through
revisiting EKC hypothesis with different set of trade policy and financial development framework. To the best
of the authors’ knowledge, earlier studies were limited to one-country data analysis and did not consider the
comparative data set of developed and developing countries with reference to financial development and FDI
components.
Keywords Economic growth, Financial development, Foreign capital inflows, FDI and environmental
degradation
Paper type Research paper

1. Introduction
Driven by accelerated economic growth, the world continues to witness persistent increase in
demand for energy consumption, leading to high carbon emissions and consequent
environmental deterioration. Developing economies, with focus on manufacturing sector International Journal of
due to export-led gross domestic product (GDP) growth model, further increase the trends in Productivity and Performance
Management
emitting greenhouse gases (GHGs). The process of globalization has not only nurtured the © Emerald Publishing Limited
1741-0401
economies through technology transfer, flow of investment, reduction in trade barriers but has DOI 10.1108/IJPPM-10-2019-0509
IJPPM also shifted the burden of higher share of environmental pollution (Tamazian and Rao (2010);
Tisdell, 2001; Borghesi, 2003; Shahbaz et al., 2018). There is no denying that globalization has
accelerated the process of economic growth in both developed and developing economies
particularly in light of regional collaborations, free trade agreements and capital inflows.
However, it has also led to new challenges, namely environmental degradation and global
warming. Due to the presence of alarming levels of pollution, sustainable environmental
development has captured global interest across all stakeholders. The growing
industrialization in developing countries has enlarged the proportion of pollution in
environment. World Bank (2008) estimated carbon emissions from developing countries to be
72% higher than Organisation for Economic Co-operation and Development (OECD) countries
by 2030. Lagging in appropriate action to reduce carbon emissions, the average global
temperature may rise over 2 8C from its pre-industrial level in the short run, with high chances
of temperature rise of 5 8C in long run (Stern, 2007). In addition, Intergovernmental Panel on
Climate Change (IPCC) estimated the rise in average global temperature between 1.4 8C and
5.8 8C by 2100 due to high GHG emissions (Pachauri et al., 2014), which in turn leads to major
catastrophes such as global warming, floods, droughts, fire and tsunami.
The inter-temporal links in environment–energy–income nexus and GHG emissions
become relevant for ensuring sustainability in economic literature. Tedesse (2005); Ghosh
(2010); Jayanthkumaran et al. (2012); Claessense and Feijen (2007); Feridun et al. (2006);
Tamazian and Rao (2010), Narayan et al. (2010); Saboori and Sulaiman (2013) have explored
the relationship between economic growth, energy consumption and carbon emission. Ghosh
(2010) examined the causal link between environmental degradation and economic growth
using autoregressive distributed lag (ARDL)-bound testing approach along with Johansen–
Juselius maximum likelihood procedure. Jayanthkumaran et al. (2012) found evidence of
environmental Kuznets curve [2] (EKC) hypothesis but insignificant association between
structural changes and carbon emission. Jensen (1996), World Bank (2000) and Shahbaz et al.
(2013) highlight trade openness as an indicator of emission intensity while Birdsall and
Wheeler (1993) consider trade openness as the measure of better technical grounds to
mitigate the negative effects of carbon emissions on environment. Nexus between FDI and
pollution density is deliberately attaining huge attention due to conflicting findings in
empirical literature.
Tedesse (2005) highlights the importance of financial development so as to induce
technological innovations leading to higher productivity. At firm level, better-governed firms
effectively manage environmental considerations. Claessense and Feijen (2007) report
governance and financial sector to enable better environmental performance. Financial and
governance framework, often viewed as an integrated effort, has been formally included in
most theoretical conceptualizations (Schellnhuber, 1999; Biermann et al., 2010). However, in
practical dimensions, it remains a major challenge to incorporate such dimensions with
model-driven research approaches (Biermann, 2007; Biermann et al., 2010). The multivariate
framework needs to include financial development in the nexus. The effectiveness of financial
development may be judged by the estimated coefficient from regression analysis. The
negative coefficient of financial development indicates improved quality of environment and
support to Sustainable Development Goals (SDGs).
The concepts of pollution haven and pollution halo hypotheses are the outcomes of FDI
impact on ecological environment of host country. Pollution halo hypothesis exists when
multinational companies with advanced technology and management encounter strict
environmental laws and standards in host countries (Zarsky, 1999). Multinational companies
with high environmental and governance standards/practices (Singhania et al., 2015; Saini
and Singhania, 2018) turn the process from environmental degradation to environmental
sustainability. However, investment by multinational companies, who limit themselves to
economic parameters and fail to consider environmental protection of host countries, is
actually the outcome of pollution haven hypothesis. FDI follows pollution haven hypothesis Environmental
signifying it as a major contributor to high carbon emissions in host countries (Gray, 2002; degradation
Perkins and Neumayer, 2008; Talukdar and Meisner, 2001). Chichilnisky (1994) and Copeland
and Taylor (1994) find that polluting industries are shifting from developed to developing
and economic
world due to reduced implementation costs and carbon taxation/fee often hinting towards growth
lower environmental standards leading to worsening of environment.
Globally there is need to reduce the GHG emissions through effective policy reforms and
multilateral agreements. However, OECD countries have initiated varied environmental
measures to attain sustainable business goals (SBGs) (OECD, 2011 [3]). Developing countries,
being vulnerable to environmental degradation, lag behind in terms of regulatory measures.
However, there is an emergent need for policy reforms both at country and at regional level to
keep pace with evolving global scenario. Egbetokun et al. (2020) recommend the strengthening
of institutional policy towards environmental protection in light of economic growth via clean
and energy-efficient methods such as innovative energy consumption using renewable
resources and check on primary sources of energy. Mu~ noz-Villamizar et al. (2019) and Saini and
Singhania (2019) propose a new methodology and concept to measure, control and improvise
the environmental performance and productivity with special reference to micro-level analysis
involving the performance of multinational companies.
In this background, our main objective is to investigate different economies’ (developed and
developing) environmental dynamic relationship with economic growth in the presence of
financial development and FDI using ARDL approach. We revisit the hypothesis through
country-wise comparative analysis over long term from 1965 to 2016 for seven sample countries.
The outcomes of the study are categorized as pollution halo hypothesis and pollution haven
hypothesis. To the best of our knowledge, this is a pioneering attempt to investigate the causes of
carbon emission and the role of financial development in sample countries. We argue that the
relationship between carbon emission and financial development may reduce the problem of
omitted variable biasness in econometric estimation. This attempt may hold relevance for policy-
based decision-making to better comprehend the determinants of environmental degradation.
International agencies continue to explore policy measures to alleviate industrialization-related
adverse effects on climate change, especially GHG emissions. Being the largest emitters of CO2,
United States of America (USA) and China need policies for mitigating the adverse
environmental repercussions. These include formulation of international guidelines,
interventionist policies and implementation of environment-friendly regulatory mechanisms.
Developing countries also need to explore upsurge in economic growth without causing
environmental degradation. Finally we propose a sample format of environmental disclosure
statement for various economic units of any country which need to be reported as part of annual
mandatory disclosures in order to attain SBGs (Table 9).
The next section discusses the stylized facts from existing literature. While Section 3
describes the methodology, Section 4 presents the results of empirical analysis and Section 5
includes discussions covering theoretical and practical implications and Section 6 discusses
conclusion and scope of future research.

2. Evidence from existing literature

The growing visible signs of climate change and global warming lead to higher awareness
towards environmental degradation. Researchers seek to constantly identify the effect of
economic activities on environmental degradation. In such backdrop, EKC hypothesis is the
most examined hypothesis explaining the relationship between income level and environmental
degradation. Higher energy consumption in 21st century has directly impacted economic
growth and led to global climate change problem. Economic growth is the outcome of increased
demand for energy consumption and is expected to grow by 48% from 2017 to 2040 (World
IJPPM energy outlook, 2017 [4]). Empirical literature highlights the linkage between economic growth,
energy consumption and GHG emissions. Evidence supports three major dimensions.

2.1 Nexus between economic growth and carbon emissions

Researchers dwell on nexus between economic growth and carbon emissions in environment
by examining the applicability of EKC hypothesis. According to this hypothesis,
environmental quality at early stages of economic growth in any country is found to be
low; however, when average income reaches a threshold point, the quality of environment
starts improving due to preference for green technology, strict institutional framework,
governance system and financial development, Grossman and Krueger (1991) [5]. Numerous
researchers highlight the relationship between GDP (per capita income) and environmental
quality using different methodological approaches, Grossman and Krueger (1995); Patel et al.
(1995); Jha (1996); Horvath (1997); Stern and Common (2001); Roca (2003); Dinda and Coondoo
(2006); Narayan et al. (2008) and Jalil and Mahmud (2009). Dinda and Coondoo (2006) and
Stern (2004) observed EKC as a long-run phenomenon.
Empirical literature supports two well-known methods investigating the existence of EKC
hypothesis and its relationship with other variables. The first approach undertakes cross-
country/regional panel data analysis (Lin and Li, 2011; Lin and Nelson, 2018) while the second
approach relies on single-region time series analysis (Boutabba, 2014; Raggad, 2018). In terms of
econometric method, cross-country panel data analysis serves as a more robust econometric
measure as it captures only the general inferences of EKC hypothesis which might not be
applicable to a specific country/area (Sugianwan and Managi, 2016; Jaunky, 2011). In case-
specific countries, based on complexity of the economic environments and historical experiences,
these need to be studied for building policy perspectives, a time series analysis framework is
preferable (Ahmad et al., 2017; Stern et al., 1996). When cross-sectional and panel data of a group
of countries are employed in empirical models, the insignificant (significant) income effect of one
country may offset the significant (insignificant) income effect of other country, thereby leading
to inconsistent results. To address this issue of aggregation biasness, the recent emerging bodies
of literature are concentrating on using time series data at individual country level. Lindmark
(2002) and Boutabba (2014) preferred time series methodology of a single country for better
results rather than a panel or cross-country analysis, owing to different economic structures and
characteristics across the world. However, cross-country research provides universal
considerations of linkages among the variables.

2.2 Economic growth and energy consumption linkage

Research indicates energy consumption stimulating economic growth and vice versa. Kraft
and Kraft (1978); Wolde-Rufael (2005, 2009); Ozturk (2010); Payne (2010); Tang and Tan
(2013); Apergis and Tang (2013) and Baranzini et al. (2013) consider causal relationship
between economic growth and energy consumption using various econometric methods such
as cointegration and Granger causality. The results were found to be controversial due to
diverse sample size, time periods, set of countries and econometric application of tools and
different stage of economic development in countries. Growth in economy is outcome of
higher demand in energy resources, which increases the emission levels, leading to
environmental degradation (Grossman and Krueger, 1995; Patel et al., 1995; Tamazian and
Rao, 2010; Shao, 2018). Huge energy consumption in poor and middle-income group
companies is accounting for high carbon emissions, and this fraction is projected to increase
in near future as per UN 2017 report [6]. EKC literature results in economic growth and energy
consumption leading to environmental degradation. Some of the studies support EKC
hypothesis (Al-Mulali et al., 2015; Cheng et al., 2017) based on energy consumption and
environmental degradation.
 There is evidence of inverted N-shaped EKC (Friedl and Getzner, 2003; Vincent et al., 1997) Environmental
and also of N-shaped EKC (Allard et al., 2018; Liu and Lin, 2019; Ozokcu and Ozdemir, 2017). degradation
Such disputed relationship between economic growth and environmental degradation may
be controlled by energy efficiency. Saini and Singhania (2019) find economic growth as the
and economic
outcome of higher demand in energy resources which increase the carbon emissions at growth
country level leading to environmental degradation. Energy consumption and trade
openness regulate economic growth and environmental quality.
There are three main aspects to environmental degradation, namely scale effect, technique
effect and composition effect. While scale effect is the outcome of economic activity and
consumption, technique effect and composition effect are outcomes of cleaner technology and
shift to greener environment. In Kuznets curve, the composition effect and technique effect
outweigh the scale effects, making trade, FDI and financial liberalization more favourable than
harmful to the environment (Antweiler et al., 2001; Grossman and Krueger, 1993). Sadorsky
(2009) found a positive and significant relationship between FDI and energy consumption. In
China, a positive relationship between FDI and carbon emissions has been observed, Zhang
(2011), Xing and Kolstad (2002). In other sample countries, FDI inflow is reported as an energy-
efficient process in promoting technological innovation, (Zhang, 2011; Xing and Kolstad, 2002).
With such varied evidence, we find that nexus between energy consumption, carbon emissions,
FDI and clean energy to be unclear and requiring further empirical analysis.

2.3 Interlinking environment degradation, economic growth and energy consumption

Zhang and Cheng (2009) investigated causal relationship between energy consumption,
economic growth and environmental pollution by using the Toda–Yamamoto procedure.
They found a unidirectional causality running from GDP to energy consumption and energy
consumption to carbon emission. However, no causality was reported between carbon
emission and economic growth in either direction in the long run. Soytas and Sari (2009)
observed unidirectional causality running from carbon emissions to energy consumption and
no causality between income and carbon emission. Zhang and Cheng (2009) reported
causality moving from energy consumption, output to carbon emission. Vidyarthi (2013)
found long-run relationship among variables and all three variables namely carbon emission,
energy consumption and economic growth. Lebel et al. (2018) considered inadequate
infrastructure, information deficits, limited planning capacity and insecure access for climate
change adoption projects. Ghosh (2010) found an ongoing association between carbon
emission, energy consumption and income after controlling for some variables.
Puig et al. (2018) used standardized questionnaire-based instrument on in-country
determinants of technology transfer for climate change mitigation. A bidirectional causality is
observed between environment degradation and foreign trade, Pao and Tsai (2011) and Nasir
and Rehman (2011). Dinda (2004) and Sarkodie and Stezov (2019) highlighted that developed
countries with stringent environmental policies and regulations transfer their dirty technologies
to developing countries with lax environmental laws and add to their pollution stock. However,
this mode of transfer is also revealing the clean and renewable energy technology in host
countries with strict environmental norms (Sarkodi and Adas, 2018). In addition, Saini and
Singhania (2019) highlight the importance of environmental performance and location of
industry as an important macro linkage between FDI and environmental stress. Institutional
framework and environmental performance of MNCs will determine the extent to which foreign
funds enhance, degrade or neutralize the sustainability of host countries. So FDI inflow and
foreign trade have become very influential factors towards either environmental degradation or
environmental sustainability. The study identified key variables and showcased a suggestive
policy framework via scaling the impact of FDI on ecological outcomes and taxation policy
towards environmental sustainability of host country.
IJPPM Most research studies are limited to select listed countries from developed (especially
Germany, Spain and United Kingdom (UK)) and developing (especially, China and India) world.
Since there is differential policy framework in each countries, we add to the literature by
comparing the two sets of economies and acknowledging the policy framework in context with
environmental sustainability by using ARDL methodology over sample countries. Table 1
tabulates the literature review on environment, foreign capital inflows and sustainability.
Table 2 represents the flow of present study towards financial development on economic
development typologies such as interest rate differentials and regulatory framework towards
capital flows.
We address the research gap in literature by considering trade openness, financial
development and FDI in explaining environmental degradations (sustainability). We contribute
to existing literature in several ways. First, we explore the impact of foreign capital inflows and
income on environmental pollution, which, to the best of our knowledge, has not been considered
in literature except by Sapkota and Bastola (2017) and Shao (2018). However, these studies are
limiting towards elucidating various control variables, say financial development and FDI
influencing the omitted variable biasness. Financial development consists of increased flow of
capital, improved stock market, banking facilities at root level and domestic credit to private
sector. Development in financial sector may enhance economic growth and determine
consumption of energy (Sadorsky, 2010, 2011a, b; Shahbaz and Lean, 2012). Financial
development lowers carbon emissions as per Tamazian et al. (2009) indicating improvement in
financial resources to support environmental-friendly production process. Shahbaz et al. (2013)
investigate the relationship between energy use and economic growth by considering financial
development, international trade and capital as important factors of production. We analyse the
linkages between financial development, FDI and energy consumption towards environmental
sustainability for sample countries, namely India, China, South Africa, Brazil, USA, Japan and UK.

3. Research methodology and data collection

We assumed the application of EKC hypothesis and long-run association amongst selected
variables for sample countries. The data set of EKC estimation was refined so that issues
raised by Stern (2004) get addressed by using ARDL methodology. The choice of
methodology must consider solution towards serial correlation, presence of stochastic or
deterministic trend, spurious correlation and omitted variable biasness in model. The sample
selection involved deductive reasoning approach wherein first we selected the major
cumulative carbon emitter countries from the EU EDGAR database [7]. Thereafter we
segregated the countries in two spheres, namely developed and developing countries. Based
on data availability we were left with seven countries wherein four (India, China, South
Africa, Brazil) in developing countries and three (USA, Japan and UK) in developed countries
were the major carbon emitters from the period 1965–2016. The variables financial
liberalization, energy, trade and GDP were found as the most important determinants of
environmental degradation as per the literature reviewed. To prove this relationship, we have
employed the following model specifications:
CO2t ¼ β0 þ α1 FDt þ α2 GDPt þ α3 GDP2t þ α4 Energyt þ α5 Tradet þ α6 FDIt þ εt (1)

Where
t and ε denote time and error, respectively
CO2 is measure of environmental degradation (measured in metric tonnes per capita)
FD stands for financial development
GDP indicates per capita real GDP (measured in local constant currency)
GDP2 is square of per capita real GDP
Author (Year), Sample
Environmental
country data Sample countries Variables Methodology degradation
and economic
Blackman and 1997– China: different FDI, technology and equipment, Survey method
Wu (1999), USA 1998 states institutional constraints, growth
locational decision, institutional
barriers, investment
environment
List and Co 1986– USA FDI, regulatory variable (firm- Logit model
(2000), USA 1993 level pollution, money spent on
air, water and solid waste,
environment protection index)
Dasgupta et al. 1990– Argentina, Chile, Environmental protection, Event study
(2001), USA 1994 Mexico and the pollution abatement investment,
Philippines pollution control equipment,
waste management
Wheeler (2001), 1985– USA, China, Foreign investment, air Qualitative study
USA 1995 Brazil and pollution, economic growth and
Mexico development, trade,
environmental protection
policies
Keller and 1977– USA FDI and pollution abatement Panel fixed effect
Levinson (2002), 1994 costs (tax, energy costs, land
USA prices, wages, unionization)
Sathiendra Conceptual Paper
Kumar (2003),
Australia
Dasgupta et al. 1993– Korea Law suits for violation of Event study
(2006), USA 1999 environmental norms, firm
guilty of environmental
degradation, citizens’ complaints
Feridun et al. 1992– Nigeria Trade openness, GFCF, labour OLS, GLS
(2006), Nigeria 1999 costs, level of deforestation, GDP,
GNP, carbon emission
He (2006), 1994– China: different Emissions (SO2), scale effect, GMM
France 2001 states technique effect, composition
effect, foreign capital, labour and
capital employed in production
Tamazian et al. 1992– BRICS, USA and Carbon emission, GDP, research Static model
(2009), Spain 2004 Japan and development, stock market
value added, financial
liberalization, financial openness
Ghosh (2010), 1971– India Carbon emission, primary Cointegration and
India 2006 energy supply, GDP, investment, causality analysis
employment using ARDL
Lin and Li 1981– 1317 Carbon emissions, GDP, industry GMM
(2011), China 2008 structure, urbanization level,
energy price, research and
development
Bloch et al. 1965– China Carbon emission, coal Cointegration and
(2012), Australia 2008 consumption, GDP, coal price error correction
Boutabba 1971– India Carbon emission, financial ARDL and VECM Table 1.
(2014), France 2008 development, economic growth, Chronological review
energy consumption and trade of studies based on
openness environment, foreign
capital inflows and
(continued ) sustainability
IJPPM Author (Year), Sample
country data Sample countries Variables Methodology

Aggarwal and Conceptual Paper

Aggarwal
(2017), India
Cao and You 2003– China: different Environmental research and Multiple regression
(2017), China 2013 states development expenditure, analysis
technological innovation,
pollution abatement costs,
environmental regulatory
intensity, financial support, size
Yu and Rowe Qualitative research based on interview of 21 companies
(2017), China
Lin and Nelson 1990– Mexico, GDP, energy consumption, FDI, OLS, panel
(2018), China 2014 Indonesia, capital stock, labour force, cointegration, panel
Nigeria and inflation VECM
Turkey
Raggad (2018), 1971– Saudi Arabia Carbon emission, energy usage, ARDL, VECM
Table 1. Saudi Arabia 2014 urbanization

Interest rate Regulatory Level of financial

differentials framework development
Economic development typologies (IRD) (RF) (FD)

Developed FD Inflow of Low IR: Profit- Strict regulatory High FD promoting

countries foreign based investment framework: Pollution mitigation of GHG
direct to emerging Halo Hypothesis emissions
capital economies
Inflow Low IRD: Low Strict regulatory High FD promoting
other than profitability framework to capital market growth by
FDI capital minimize frauds providing green finance
to entrepreneurs
Developing FD Inflow of High IR: Profit Low regulatory Low FD: Promoting GHG
countries Foreign based investment framework: Pollution emissions, dumping
direct received Haven Hypothesis grounds of second- and
capital third-tier technology
Inflow High IRD: High Low regulatory Low FD: Emergent stage
other than capital gains framework may cause of capital market:
FDI capital frauds Providing brown finance
to entrepreneurs
Literature support Lin and Nelson Wheeler (2001), Keller List and Co (2000),
(2018), Reinhart and Levinson (2002), Tamazian et al. (2009),
(2005) Dasgupta et al. (2006), Ghosh (2010), Boutabba
List and Co (2000) (2014), Cao and You
(2017)
Table 2. Note(s): NFD 5 Non-Financial Development; FD 5 Financial Development; IRD 5 Interest Rate Differentials;
Flow of present study RF 5 Regulatory framework

Energy means energy consumption (kg of oil equivalent per capita), as a proxy of economic
growth
Trade represents the trade openness, total of imports and exports as the share of GDP
 FDI represents foreign direct investment Environmental
The parameters α1, α2, α3, α4, α5, α6 were the long-term elasticity estimators of CO2 degradation
emissions with respect to financial development, per capita real GDP, square of per capita real
GDP, energy consumption, trade openness and FDI, respectively. The current increase in
and economic
energy pollution was influenced by carbon emissions in previous period. It predicated that growth
α4 > 0. The consistent rise in the economic growth was associated with higher carbon
emissions and α2 > 0. The effect of financial development in a country depends upon the level
of maturity achieved by the sector. Financial structure is said to be mature if the funding of
environmental quality projects was monitored effectively. A mature financial sector
encouraged the firms to invest more in cleaner projects rather, an immature financial sector
aspired to get profits at any cost by lending the money to investors and borrowers (Bello and
Abimbola, 2010) irrespective of environmental concerns. The financial sector contributed
towards environmental protection by allocating financial resources to environment-friendly
projects. It means that financial development coefficient might have positive or negative sign.
The impact of trade openness and FDI coefficient was again ambiguous and their sign may
go in either way (Boutabba, 2014). Since the developing countries had ample resources in
terms of labour and natural resources, the FDI variable attempted to promote heavy
industries which in general were pollution-intensive. In contrast, developed economies where
industries were environmentally cleaner had changed from energy-intensive industries to
services and information-based industries (Grossman and Kruger, 1995). The EKC hypothesis
suggested the sign of α2 > 0 [8] and α3 > 0 [9].
The data was sourced from World Development Indicators (WDI) from 1965 to 2016. All
variables were transformed into natural logarithmic value to overcome the problem of
heteroscedasticity and estimates were interpreted in terms of percentage change. The two
variables, namely GDP and GDP2 were found to be collinear. To address this, we first square the
GDP term and convert the series into natural logarithmic value. It is also important to specify that
we have considered the lag value of log square term GDP to solve the problem of
multicollinearity. However, other issues related to endogeneity in the data set have already
been taken care by the technique itself (Narayan, 2005). In ARDL, all variables were assumed to
be endogenous. Hence, both the regressand and regressors enter the models with lags, and they
corrected the potential endogeneity of regressor through appropriate augmentation (Pesaran and
Shin, 1999). The super-consistency property in the presence of cointegration ensured that we need
not worry about endogeneity. Apart from this, ARDL has several advantages over other
techniques of cointegration such as Engle and Granger (1987), Johansen and Juselius (1990).
Firstly, it could be applied irrespective of whether the underlying variable found at I [10](0), I
[11](1) or combination of both (Pesaran and Pesaran, 1997). Secondly, ARDL procedure is
statistically a more significant approach to determine cointegration relation in a small sample
than that of Johansen and Juselius cointegration technique (Pesaran and Shin, 1999). Thirdly,
even when the model regressor is found to be endogenous, the bound testing approach generally
provides unbiased long-run estimates and valid t-statistics (Narayan, 2005). Fourthly, the model
considers sufficient lag to capture data generation process to specific model framework
(Narayan, 2005). Fifthly, the error correction model (ECM) may be derived from ARDL through
simple linear transformation, which integrates short-run adjustments with long-run equilibrium
without losing long-run information (Pesaran and Shin, 1999).

3.1 Estimation procedure

ARDL-bound testing procedure, developed by Pesaran et al. (2001), was used in the study. It
involved a two-step investigation procedure. The first step was to examine the existence of
long-run relationship among variables through the equation and followed by accounting for
the long-run as well as short-run estimations if there was evidence of cointegration among the
IJPPM variables. In ARDL estimation, technique bound test was used to determine whether or not
the long-run relationship exists among the variables. The null hypothesis of no cointegration
among the variables was tested by a joint significance value of F-statistics. If the F-statistic
value is found to be greater than the upper critical value as per Narayan (2005), the null
hypothesis of no cointegration would get rejected, implying a long-run relationship among
the variables. If the test statistics found to be lower than the lower bound value, then surely
the evidences of cointegration will get rejected; however, if F-statistics were found between
lower and upper bounds, then the decision remains inconclusive. The importance of ARDL
over other techniques such as cointegration, Enger and Granger, 1987 and Johansen and
Juselius (1990) were many. Few of them concluded that ARDL used a more strengthened
approach due to inclusion of different lag integration in estimation (Pesaran and Pesaran,
1997); more statistical significant method even to small samples (as compared to Johansen
and Juselius cointegration technique), making it quite acceptable and popular in present
scenario, Pesaran and Shin (1999). It is used to provide unbiased long-run estimates and valid
t-statistics (Narayan, 2005) in case regressors are endogenous. ECM, the part of ARDL
methodology formed the short-run adjustment without losing the long-run information
(Pesaran and Shin, 1999). Thereafter, we apply Granger causality tests to check the direction
of causality among the variables.
If the variables are found to be cointegrated, then there exists a valid error correction
model representation in the data (Engle and Granger, 1987) identified by using vector error
correction model (VECM). The VECM allows to capture both a short-run and a long-run
Granger causality, wherein short-run causal effects are examined by applying F-statistics on
lagged explanatory variables and a significant t-test is used for testing the coefficient
of lagged error correction term for long-run causal effect. Finally to verify the stability of
long-run parameters, the current study adopted cumulative sum of recursive residual
(CUSUM) and cumulative sum of squares of recursive residuals (CUSUMQ), Pesaran and
Shin (1999).

3.2 Stationarity
For estimating any type of long-run relationship, it becomes very important to verify the
stationary property of the variables. Non-stationary variables turn into spurious
relationship. The concept behind unit root testing was to find the shocks in the series
having some permanent effect which did not die out. Once we found unit root problem, we
have de-trended the series for further analysis. We used two methods of unit root testing for
dependent variable series; however, for independent series we applied augmented Dicky–
Fuller (ADF) technique of unit root tests. To account for structural breaks, we used
Clemente–Monta~ nes–Reyes unit root test with double mean shifts, AO model at 1, 5 and 10%
level of significance. We first conducted the unit root analysis at level data with trend and
intercept and then at first differencing unit root was checked with trend and intercept. We
also employed multiple structural break analysis using Bai and Perron (2003) structural
break methodology for robust results. The test for structural break was mandatory to
perform because the existence of structural breaks in the series provides biased results
towards the non-rejection of null hypothesis of having unit root. ARDL-bound testing might
be applied to variables irrespective of the order of integration at I (0) or I (1). In ARDL-bound
testing, it is necessary to ensure that none of the variables are integrated at I (2) or beyond,
Pesaran et al. (2001).

3.3 Long- and short-run elasticities

Akaike information criteria (AIC) and Schwarz–Bayesian information criterion (SIC) were
used to select the most optimal lag. If the coefficient of lagged error correction term is
negatively significant at 1%, it supports the evidence of a stable long-run relationship among Environmental
the variables. The diagnostic tests and stability tests were performed based on long-run and degradation
short-run dynamics to gauge the adequacy of model. Diagnostic tests involved testing of
serial correlation, heteroscedastic and non-normality in the residuals of model across the
and economic
sample period. For stability testing, CUSUM and CUSUM of square tests were used which growth
represented a well-defined statistics within the critical bound values, implying that all
coefficients were stable as per Pesaran and Pesaran (1997).
3.3.1 Cointegration analysis. ARDL analysis involved estimation of the following
equation.
X p Xp Xp X p
ΔCO2t ¼ β0 þ β1i ΔCO2t−i þ α1i ΔFDt−i þ α2i ΔGDPt−i þ α3i ΔGDP2t−i
i¼0 i¼0 i¼0 i¼0

X
p X
p X
p
þ α4i ΔEnergyti þ α5i ΔTradet−i þ α6i ΔFDIt−1 þ λ1 CO2t−1
i¼0 i¼0 i¼0

þ λ2 FD2t−1 þ λ3 GDPt−1 þ λ4 GDP2t−1 þ λ5 Energyt−1 þ λ6 Tradet−1 þ μt (2)

Where Δ denotes the first difference operator, where μt represents white noise residuals and
other variables CO2, FD, GDP, GDP2, Energy, Trade and FDI are as defined earlier. The terms
with Σ sign represent the error correction dynamics, and λ represents the long-run
relationship. The equation incorporates the time-related trend variable to capture the
autonomous time-related changes.
If there exists a long-run relationship among the variables, the next step initiates the
estimation of the ECM:
Xp Xp Xp X p
CO2t ¼ β0 þ β1i ΔCO2t−i þ α1i ΔFDt−i þ α2i ΔGDPt−i þ α3i ΔGDP2t−i
i¼0 i¼0 i¼0 i¼0

X
p X
p X
p
þ α4i ΔEnergyt−i þ α5i ΔTradet−i þ α6i ΔFDIt−i þ ηECTt−1 þ μt (3)
i¼0 i¼0 i¼0

Where η captured the speed of adjustment to obtain the equilibrium in the event of shock to
the system and ECTt-1 counted the residual that was obtained from the estimated
cointegration model of Eqn (1). The value of F-statistics depends on the number of lags [12] of
variables incorporated in the model to differentiated variable (Bahmani-Oskooee and Nasir,
2004). The calculated F-statistics need to be checked with the critical bound values [13]. If the
value of F statistics is found below the lower bound value, then we assume no cointegration
present in the model. If F-statistics value lies between lower and upper bound, then we
assume inconclusive cointegration which depicts the situation of dilemma as to whether or
not null hypothesis of no cointegration relationship should be rejected. In the case of
inconclusive model, it could be proposed to check for error correction term to establish
cointegration (Banerjee et al., 1998; Kremers et al., 1992).
3.3.2 Short-run elasticities. The cointegration relationship among different variables
suggested the possibility of unidirectional and bidirectional causality running in one
direction to another. However, cointegration analysis did not indicate the direction of
temporal causality among the variables. We have tried to accommodate the long-run and
short-run causality based on lag selection criterion used in Eqn (4) that could be measured
through t-statistics and F-statistics of the model.
3.3.3 Short-run causality. The existence or absence of cointegration relationship has been
studied by ARDL-bound methods. However, cointegration test has a limitation wherein the
IJPPM causality among the variables is not being captured. If no evidence of cointegration is found
among the variables, then the specification of Granger causality would be a vector auto
regressive (VAR) model in first difference form. If there exists the evidence of cointegration,
then we further use Granger causality with one-year lagged ECT term (ECTt-1). The
augmented form of Granger causality test with ECM was formulated in multivariate equation
in the form of VECM as specified in Eqn (4).
2 3 2 3
Co2t 2 3 2 3 CO2t−1
6 FD 7 b1 c11 c21 c 31 c 41 c 51 c 61 6 7
6 t 7 6b 7 6 c21 c22 c32 c42 c52 c62 76 FDt−1 7
6 7 6 27 6 7 6 7
6 GDPt 7 6 7 6 c31 c32 c33 c34 c35 c36 76 6 GDP 7
6 7 6 b3 7 X q
6 76
t−1 7
6 2 7 6 7 6 7 2 7
ð1  BÞ6 GDPt 7 ¼ 6 b4 7 þ ð1  BÞ6 c41 c42 c43 c44 c45 c46 76 GDPt−1 7
6 7 6 7 t¼1 6 7 6 7
6 Energyt 7 6 b5 7 6 c51 c52 c53 c54 c55 c56 76 Energyt−1 7
6 7 4 5 4 c61 c62 c63 c64 c65 c66 56 6 7
6 7 b6 7
4 Tradet 5 4 Tradet−1 5
b7 c71 c72 c73 c74 c75 c76
FDIt FDIt−1
2 3 2 3
δ1 γ 1t
6 δ2 7 6 γ 2t 7
6 7 6 7
6 δ3 7 6 γ 3t 7
6 7 6 7
6 7
þ 6 δ4 7½ECTt−1  þ 6 7
6 γ 4t 7
6 δ5 7 6 γ 5t 7
6 7 6 7
4 δ6 5 4 γ 6t 5
δ7 γ 7t
(4)

Engle and Granger (1987) cautioned that if the series were integrated of order 1, in the
presence of cointegration, then the author needs to augment the Granger-type causality test
model with a one-period lagged error term and if we go for cointegration VAR estimation in
this case, then differences will provide misleading results. The augmented form of Granger
causality test with ECM was formulated in multivariate qth order of VECM model as
suggested in Eqn 4. Here in equation, (1B) is the lag operation. This type of equation
captured both short-run and long-run Granger causality. The short-run results were
represented by F-test of the lagged explanatory variable (using Wald statistics), while the
long-run causal effects were represented by t-statistics on the coefficient of lagged error
correction term (ECTt1).

4. Empirical results and analysis

Initially unit root test was applied considering structural breaks. To establish long- and short-
run association, we use ARDL-bound testing and ECM among the variables. The result tables
represent diagnostic tests evidencing good statistical performance.

4.1 Unit root test

As shown in Table 3, carbon emission series for sample data was presented with double mean
shift structural break points. Across samples, the unit root test hypotheses with two
structural breaks got rejected for LCO2 at level. Similar to the results shown in Table 3, the
null hypothesis of unit root with two structural breaks could not be rejected for LCO2 in level.
However, at first difference, the null hypothesis of unit root for all series was rejected at 1%
level, suggesting that they were integrated at order 1 that is I (1). Table 4 represented the
result of ADF test for other independent variables for which the results from variables did not
show significant break points using Clemente–Monta~ nes–Reyes unit root test with double Environmental
mean shifts, AO model. As none of the variables were integrated at order 2, we have used degradation
ARDL-bound procedure to examine the long-run relationship.
Plethora of industrialization and economic reforms (Boutabba, 2014) in developed and
and economic
developing countries during 1990s lead to high carbon emission. Reforms included abolition growth
of licensing for few industries and financial aid to weak industries. High dependency on fossil
fuels especially in developing countries such as India, Brazil, South Africa and China caused
high emissions. China was booming up with coal power plants in 2005–07 (Guan et al., 2009),
and huge industrialization in India and South Africa fuelled high capital inflows during first
decade of the 21st century which also led to huge emissions (Olivier et al. (2012)).

4.2 Cointegration test results

We introduced dummy variable for structural breakpoints in carbon emission series that
varies from country to country. The dummy variable structural breaks were specified by
Clemente–Monta~ nes–Reyes with double mean shifts methodology. The cointegration tests
under bound testing approach involve comparing the F-statistics against critical values
which were based on lag imposition each time on difference variable (Bahmani-Oskooee and
Nasir, 2004). We selected the optimal lag length of the model based on AIC and SIC
information criteria, indicating the optimum lag length to one/two on different data sets of
sample countries. The values that lie between the lower and upper bounds of critical values
indicate model as inconclusive or not and null hypothesis of no cointegration relationship
should be rejected. In this case, as mentioned earlier, the error correction term becomes very
useful in establishing long-run relationship (Banerjee et al., 1998; Kremers et al., 1992). In case
the calculative F-statistic was found above the upper bound, the results were said to be
conclusive indicating cointegration among the variables (see Table 5).

4.3 Long-run and short-run elasticities

The ARDL cointegration procedure was used to estimate the parameters of Eqn (2). The AIC
criterion has been utilized to find the coefficients of level variables. AIC is considered as
parsimonious model, which not only selected the smallest possible lag length but also
minimized the loss of degree of freedom (Boutabba, 2014). Table 6 listed the country-wise
long-run estimated results. The energy coefficient has a long-run positive impact on carbon
emission for China and USA and was also found to be statistically significant. This implied
not only developing counties but developed countries also have higher level of energy
consumption with greater economic activities, thereby stimulating carbon emissions. For
analysing the EKC hypothesis, we need to look at coefficients of GDP and GDP2 terms.
Evidence of the EKC hypothesis was not found in case of Brazil and UK. In both sets of
countries, linear and non-linear terms of real GDP failed to provide evidence in support of

One/two break unit root test (Clemente–Monta~nes–Reyes with double mean shifts) Break period
Series: LCO2 per capita (dependent variable)

Country Break point1 (t-statistics) Break point 2 (t-statistics)

India 2000 (9.207) 2010 (8.235) 2000, 2010
China 1996 (7.637) 2007 (11.970) 1996, 2007
South Africa 1990 (13.167) 2004 (7.002) 1990, 2004 Table 3.
Brazil 2002 (5.490) 2010 (5.877) 2002, 2010 One/two break unit
United States 1992 (10.399) 2009 (7.314) 1992, 2009 root test (Clemente–
Japan 1990 (16.725) 2006 (3.609) 1990, 2006 nes–Reyes with
Monta~
United Kingdom 1990 (9.004) 2009 (8.281) 1990, 2009 double mean shifts)
 variables
Table 4.
IJPPM

for independent
Augmented Dickey–
Fuller [18] (ADF) test
Energy GDP GDP2 Trade FDI FD

Level First Level First Level First Level First Level First Level First
difference difference difference difference difference difference
India 0.937 3.90*** 4.34*** 5.48*** 5.38*** 4.81*** 0.348 6.09*** 3.194** 11.358*** 1.419 5.402***
China 0.517 3.10** 0.57 4.12*** 0.925 3.58** 0.727 4.43*** 10.93*** 53.775*** 3.71*** 3.945***
South 1.841 6.32*** 0.935 4.12*** 0.926 4.13*** 0.645 5.139*** 1.100 5.179*** 0.315 6.463***
Africa
Brazil 0.705 5.81*** 3.17** 4.41*** –0.015*** 4.42*** 0.188 5.553*** 0.682 7.289*** 1.652 8.737***
United 1.272 4.95*** 1.727 5.03*** 1.596 5.02*** 1.81* 5.281*** 3.287** 7.326*** 0.325 6.776***
States
Japan 1.202 6.53*** 2.50 4.62*** 2.413 4.68*** 1.97* 8.272*** 2.10** 7.684*** 1.476 4.786***
UK 2.82* 6.23*** 2.53 4.84*** 2.334 4.89*** 0.403 7.008*** 1.27 6.099*** 1.875 7.813***
Country Model F-statistics Conclusion
Environmental
degradation
India F(CO2/CO2(-1), Energy, GDP, GDP2, FD, FDI, Trade) 3.383197 Conclusive and economic
(1,2,1,1,1,1,1,1)
China F(CO2/CO2(-1), Energy, GDP, GDP2, FD, FDI, Trade) 2.731623 Inconclusive growth
(1,2,1,1,1,1,1,1)
South Africa F(CO2/CO2(-1), Energy, GDP, GDP2, FDI) (1,2,1,1,1) 2.329432 Inconclusive
Brazil F(CO2/CO2(-1), Energy, GDP, GDP2, FDI, FD, Trade) 2.311626 Inconclusive
(1,1,2,1,2,1)
United States F(CO2/CO2(-1), Energy, GDP, GDP2 FDI, FD, Trade) 2.561522 Inconclusive
(1,1,1,1,1,1)
Japan F(CO2/CO2(-1), Energy, GDP, GDP2, FD, Trade) (1,1,1,1,1,1) 2.119001 Inconclusive Table 5.
United F(CO2/CO2(-1), Energy, GDP, GDP2, FDI, FD, Trade) 5.633211 Conclusive Results of F-test for
Kingdom (2,1,1,1,1,1) sample countries

inverted-U-shaped relationship between carbon emissions and economic growth. For India,
China, Japan, USA and South Africa, the EKC hypothesis was observed to have inverted-U-
shaped relationship between carbon emissions and economic growth. Results indicate that a
1% rise in GDP increases carbon emissions by respective magnitude of coefficient, while the
negative coefficient of squared term seems to corroborate the delinking of carbon emissions
and real GDP at higher levels of income. The evidence supported EKC hypothesis and
revealed that carbon emissions increase in initial stages of growth but start declining after a
threshold point. In terms of financial development, the results revealed a significant and
positive association between financial development and carbon emission in case of India and
USA, which was consistent with results of Boutabba (2014) and Zhang (2011), while negative
and significant in UK, Tamazian et al. (2009). This signifies that in India and USA, financial
credits lead to environmental degradation. However, in UK financial credits lead to lowering
carbon emissions by providing green finance and green credit to industries to support
sustainability. Foreign capital inflow in India has a significant positive impact on
environment degradation, signifying foreign capital to promote heavy industries which
are usually considered pollution-intensive (in line with results of Acharyya, 2009; He, 2006).
Trade openness in Japan, USA and South Africa had significant negative impact on carbon
emission (Sbia et al., 2014) as these countries might be using energy-efficient and environment
sustainable products. However, in Brazil, trade openness degrades environmental quality
through increased carbon emission (Boutabba, 2014). The results were found to be robust in
nature, as depicted by diagnostic tests in second part of Table 6. There was no neglect of
normality, heteroscedasticity, autocorrelation in residuals of our model. Thus, models exhibit
desired econometric properties. The stability tests using CUSUM test indicate the residuals of
models were relatively stable. Hence, this model could further be used for managerial policy
implications considering financial development, income and energy use, trade openness
nexus with the level of carbon emission. Both linear and non-linear terms of real GDP provide
evidence of supporting inverted-U-shaped relationship between economic growth and carbon
emission for different countries, that is, India, China, Japan, USA and South Africa, indicating
that 1% change in economic growth leads to 1.47, 0.77, 10.25, 7.45, 0.48 percentage change in
partial slope coefficient of carbon emission, respectively. Similarly, negative and significant
coefficient of squared term of economic growth showed inverted-U-shaped relationship and
supported the EKC hypothesis.
The short-run dynamics were presented in Table 7. The coefficient of lagged error term was
found to be significant with the correct sign at 1, 5 and 10% level of significance, which supports
evidence of a stable long-run relationship among variables. The coefficient of lagged error term
represented the magnitude of deviation from long-run equilibrium level of carbon emission in one
 Table 6.
IJPPM

sample countries
Long-run estimates of
Variables India China Japan Brazil USA UK South Africa

Panel A: Long-run estimations

C 7.396*** 12.773*** 55.425** (2.363) 25.984 41.094*** 13.351 (0.947) 0.279 (0.153)
(2.737) (7.544) (1.294) (2.700)
LCO2(1) 0.586*** (5.079) 0.381*** (3.448) 0.337 (1.572) 0.574*** (4.067) 0.161 (0.531) 0.384*** (3.020) 0.742*** (4.87)
LEnergy(2) 0.186 (1.243) 1.549*** (9.699) 0.067 (0.501) 0.264 (1.096) 1.0457*** (2.829) 0.278 (1.404) 0.181 (1.071)
LGDP(1) 1.476** (2.248) 0.779* (2.41) 10.250** (2.308) 5.637 (1.263) 7.450** (2.581) 2.736 (0.929) 0.481* (1.755)
2
LGDP (1) 0.088** (1.943) 0.053** (2.096) 0.515** 0.331 (1.303) 0.372** (2.638) 0.145 (0.981) 0.040**
(2.343) (1.970)
LFD(1) 0.100*** (3.167) 0.094 (1.290) 0.0003 (0.003) 0.0096 (0.431) 0.415*** (4.20) 0.241***
(2.788)
LFDI(1) 0.003** (2.075) 0.018 (1.144) 0.0048 (0.348) 0.005 (0.064) 0.017 (1.100) 0.002 (0.771)
LTrade(1) 0.021 (0.562) 0.119* (2.012) 0.139*** (2.781) 0.123** (2.375) 0.069*
(2.003)
Dummy 1990 0.002 (0.079) 0.012 (0.620) 0.062*** (3.561)
Dummy 2004 0.050 (1.332)
Dummy 1992 0.041* (1.845)
Dummy 2009 0.018 (0.969) 0.052** (2.292)
Dummy 1996 0.073** (2.603)
Dummy 2007 0.026 (0.312)
Dummy 2000 0.065***
(2.922)
Dummy 2010 0.017 (0.599) 0.116*** (2.812)
Dummy 2002 0.0046 (0.157)
R2 0.997 0.996 0.911 0.969 0.957 0.950 0.817
Adjusted R2 0.997 0.995925 0.893 0.961 0.946 0.939 0.787
F-statistics 2284.224*** 1009.030 (0.00) 51.208 (0.00) (117.431)*** (93.139)*** (85.687)*** 27.486 (0.00)
Durbin Watson 2.23 1.859594 1.882 1.944 1.712 2.108 1.736
Normality (p-value) 0.957 0.5333 0.118 0.559 0.459 0.752 0.691
BG LM Test 0.1429 0.8157 0.847 0.763 0.318 0.811 0.189
(p-value)
ARCH LM (p-value) 0.4454 0.344 0.707 0.669 0.117 0.179 0.767
CUSUM Test Stable Stable Stable Stable Stable Stable Stable
Short run estimates India China Japan Brazil USA UK South Africa

Variables
C 0.119** (2.472) 0.025 (0.874) 0.044** (2.371) 0.006 (0.68) 0.009 (1.062) 0.0106 (0.719) 0.004 (0.424)
D(CO2(1)) 0.492* (1.749) 0.419** (2.047) 0.333 (0.724)
D(LEnergy) 0.610*** (3.782) 0.442* (1.749) 0.021 (0.151) 0.506 (1.015) 0.175 (1.08) 0.796 (1.218) 0.172 (0.761)
D(LGDP) 3.401*** (2.833) 0.309 (0.175) 3.143 (0.277) 16.47** (2.415) 1.230 (0.180) 7.505 (0.691) 38.987 (0.975)
D(LGDP2) 0.254*** (2.685) 0.0719 (0.545) 0.109 (0.204) 0.908** (2.364) 0.065 (0.199) 0.356 (0.668) 2.238 (0.980)
LFD 0.037*** (2.826) 0.157 (1.454) 0.094 (0.945) 0.027 (1.200) 0.152 (1.281) 0.213** (2.305)
D(LFDI) 0.001 (–0.811) 0.0209 (0.623) 0.0041 (1.501) 0.00027 (0.018) 0.004 (–0.391) 0.020 (1.371)
D(LTrade) 0.062* (1.658) 0.042 (0.758) 0.140** (2.241) 0.043 (0.351) 0.184** (1.769) 0.164 (1.045)
ECT(-1) 0.373*** (3.623) 0.772** (2.332) 0.543*** (2.861) 0.516*** (3.153) 0.755** (1.975) 0.773** (2.053) 0.883*** (2.683)
Dummy 2000 0.030 (1.423)
Dummy 2010 0.056** (2.512)
Dummy 1996 0.011 (0.440)
Dummy 2007 0.015 (0.617)
Dummy 1990 0.0332* (1.742)
Dummy 2009 0.034* (1.831)
Dummy 2008 0.020** (2.063)
Dummy 1990 0.013 (0.963)
Dummy 2009 0.016 (1.007)
Dummy 1990 0.052** (2.65)
Dummy 2004 0.018 (0.98)
R2 0.499 0.585 0.698 0.375 0.430 0.283 0.21903
Adjusted R2 0.399 0.423 0.597 0.210 0.288 0.093 0.062836
F-statistics 4.99 (0.000) 3.61 (0.000) 6.95 (0.000) 2.271 (0.021) 3.028 (0.0084) 2.492 (0.000) 2.402 (0.00)
Durbin–Watson 1.85 1.87 1.782 1.97 1.75 2.26 2.04
Normality (p-value) 0.855 0.598 0.845 0.106 0.771 0.052 0.084
BG LM test (p-value) 0.248 0.930 0.788 0.921 0.504 0.111 0.895
ARCH LM (p-value) 0.893 0.644 0.421 0.779 0.879 0.148 0.836
CUSUM Test Stable Stable Stable Stable Stable Stable Stable
Environmental
and economic
growth

Short-run estimates of
degradation

Table 7.

sample countries
IJPPM period, which was corrected by that specific percentage over the following period of time. In short
run, the results of all seven countries support long-run dynamics as presented in Table 7. The
coefficient of lagged error correction term is significant with negative sign, which supported the
evidence of a stable long-run relationship among the variables. The coefficient of ECT (1)
suggested that the deviation from long-run equilibrium level of carbon emission in one year is
corrected by 37, 77, 54, 51, 75, 77 and 88% in India, China, Japan, Brazil, US, UK and South Africa,
respectively. The elasticity of carbon emissions with energy in short run was found to be
statistically significant in case of India and China. The findings for Indian data set indicate long-
run income elasticity for CO2 emissions to be less than the short-run elasticity. This further
provided the evidence for an EKC (Narayan and Narayan, 2010). Evidence of EKC hypothesis
was found for India and Brazil in the short run (Table 7). Similar to long-run dynamics, financial
development degraded environmental situation in India but improved in UK by supporting
environmental-friendly investment. In the short run, we did not find the evidence of
environmental improvements due to FDI in any country under consideration, because of weak
environmental regulations followed in pollution haven hypothesis (Cole and Fredriksson, 2009;
Acharyya, 2009). Trade openness showed significant upgradations in environmental
improvement in India and US (Kanjilal and Ghosh, 2013) and degradation in Japan. The
positive effects included increased growth and technology transfer accompanied by distribution
of environmental-friendly high-quality goods in exports and imports, while negative effect
stemmed from reallocation of pollution-intensive economic activities in country which was due to
lax environmental law and policies (Martınez-Zarzoso and Oueslati, 2018). The diagnostic tests
for the model were presented in Table 7, only normality assumption is violated in UK and South
Africa. In short run also, the estimates of model were supported by desired econometric
properties. The diagnostic tests were represented at the bottom of Table 7. We did not find any
neglect in autocorrelation or heteroscedasticity present in residuals of model across sample
countries. The CUSUM test statistics were well within critical bounds, implying all ECMs to be
relatively stable. Therefore the empirical model could further be utilized for policy implications
considering financial development, green and innovative inflows of funds, trade openness and
GDP growth of the country.

4.4 Error correction and Granger causality results

Existence of cointegration relationship among carbon emissions and other variables
suggested that Granger causality must be present at least in one direction, but cointegration
failed to indicate direction of temporal causality among variables. We examined both short-
run and long-run causality using lag order as specified in Eqn 4.
The existence of cointegrating relation among carbon emission, financial development,
GDP, energy consumption and trade openness suggested the existence of Granger causality
in at least one direction. However, cointegration analysis did not indicate the direction of
causality among the variables. As suggested lag length criteria is 1, the long-run causality
might be captured by significance of the differenced variable measured directly through
corresponding t-statistics. And short-run causality might be captured by F-statistics using
Wald test. Table 8 signified the long- and short-run causality running from different
equations, namely financial development, per capita real GDP and GDP2, per capita energy
consumption and trade development.
Looking at long-run causality results of India, in trade equation we did not find any
causality running towards it. However, in energy equation causality was running towards
GDP and GDP2. Bidirectional causality was found between financial development and carbon
emission and unidirectional causality running from GDP and FDI to carbon emission without
feedback [14] which specified GDP growth and FDI inflows to degrade environmental quality
(Zarsky, 1999; World Bank, 2000) in India.
India
CO2 Trade Energy FD GDP GDP2 ECT
CO2 – 0.580 (0.55) 0.085 (0.901) 0.893 (0.410) 2.662* (0.08) 2.816* (0.074) 0.045** (0.048)
Trade 1.814 (0.171) – 0.118 (0.881) 0.003 (0.880) 1.235 (0.31) 1.142 (0.33) 0.0006 (0.981)
Energy 0.249 (0.780) 1.838 (0.175) – 0.610 (0.549) 3.419** (0.0447) 3.417** (0.0448) 0.220*** (0.0048)
FD 2.244 (0.124) 0.055 (0.945) 1.656 (0.206) – 0.447 (0.6430) 0.338 (0.715) 0.005** (0.0443)
GDP 1.831 (0.765) 0.910 (0.414) 1.461 (0.476) 0.639 (0.534) – 0.670 (0.514) 0.116** (0.039)
GDP2 2.135 (0.1343) 0.992 (0.3814) 1.601 (0.581) 0.541 (0.587) 0.941 (0.400) – 0.207 (0.2152)
China
CO2 Trade Energy FD GDP GDP2 ECT
CO2 – 0.556 (0.5811) 1.237 (0.3088) 0.952 (0.400) 2.461* (0.095) 2.410 (0.110) 0.337** (0.049)
Trade 1.058 (0.362) – 1.523 (0.238) 0.674 (0.518) 3.865** (0.038) 4.156** (0.028) 0.523** (0.040)
Energy 0.625 (0.546) 0.061 (0.940) – 0.0000 (0.999) 0.589 (0.564) 0.534 (0.596) 0.296 (0.7610)
FD 4.221** (0.0281) 1.141 (0.337) 4.968** (0.016) – 6.008*** (0.006) 4.747** (0.017) 0.020** (0.0275)
GDP 2.093 (0.146) 0.982 (0.390) 0.419 (0.662) 0.292 (0.7488) – 4.901** (0.0169) 0.619*** (0.003)
GDP2 2.176 (0.132) 1.871 (0.179) 0.079 (0.923) 1.090 (0.355) – 0.096** (0.0435)
Japan
CO2 Trade Energy FD GDP GDP2 ECT
CO2 – 4.239** (0.0251) 0.0428 (0.958) 1.436 (0.255) 0.955 (0.397) 0.903 (0.4171) 0.001 (0.889)
Trade 0.245 (0.784) – 0.580 (0.566) 0.389 (0.680) 0.877 (0.427) 0.862 (0.433) 0.123* (0.093)
Energy 0.736 (0.488) 2.545** (0.078) – 2.565* (0.076) 0.726 (0.492) 0.687 (0.511) 0.006 (0.846)
FD 0.459 (0.636) 0.136 (0.872) 0.110 (0.896) – 0.170 (0.844) 0.200 (0.819) 0.011 (0.851)
GDP 1.041 (0.366) 2.574** (0.076) 0.116 (0.890) 3.358** (0.049) – 0.035 (0.965) 0.529 (0.157)
GDP2 1.047 (0.364) 2.544** (0.078) 0.109 (0.896) 3.330** (0.051) 0.037 (0.963) – 0.396 (0.181)
Brazil
CO2 Trade Energy FD GDP GDP2 FDI ECT
CO2 – 0.846( 0.439) 3.306*( 0.050) 0.361 (0.698) 4.531** (0.019) 4.569** (0.018) 0.457 (0.637) 0.236*** (0.00)
Trade 3.140** (0.04) – 0.114 (0.892) 0.294 (0.746) 3.352** (0.049) 3.378** (0.048) 1.320 (0.282) 0.117*** (0.00)
Energy 0.664 (0.522) 0.264 (0.769) – 0.038 (0.961) 2.714* (0.083) 2.778* (0.078) 0.611 (0.549) 0.447* (0.054)
FD 0.307 (0.737) 0.110 (0.895) 0.196 (0.822) – 0.147 (0.863) 0.152 (0.859) 11.505*** (0.00) 0.109 (0.3683)
GDP 1.866 (0.174) 1.073 (0.351) 0.396 (0.676) 1.007 (0.378) – 1.243 (0.304) 1.963 (0.159) 1.08** (0.047)
GDP2 1.176 (0.322) 0.872 (0.428) 1.224 (0.308) 1.018 (0.370) 0.029 (0.970) – 0.630 (0.539) 0.849 (0.539)
FDI 3.185* (0.056) 2.461* (0.085) 0.166( 0.847) 1.562 (0.223) 2.543* (0.096) 2.504** (0.099) – 0.0173*** (0.00)

(continued )
Environmental
and economic
growth
degradation

Table 8.

results
Granger causality
 Table 8.
IJPPM
UK
CO2 Trade Energy FD GDP GDP2 ECT
CO2 – 1.044 (0.364) 0.015 (0.984) 1.593 (0.220) 0.764 (0.474) 0.797 (0.459) 0.315* (0.080)
Trade/FDI 0.983 (0.385) – 2.832* (0.0747) 0.440 (0.647) 0.104 (0.901) 0.075 (0.927) 0.001** (0.016)
Energy 0.212 (0.809) 1.795 (0.183) – 2.130 (0.136) 1.851 (0.174) 1.893 (0.168) 0.243*** (0.043)
FD 2.316 (0.116) 0.885 (0.423) 2.112 (0.138) 1.749 (0.191) 1.590 (0.220) 0.097* (0.062)
GDP 0.158 (0.854) 0.909 (0.413) 0.3449 (0.711) 0.254 (0.777) – 0.177 (0.838) 0.784 (0.542)
GDP2 0.174 (0.840) 0.936 (0.403) 0.370 (0.693) 0.246 (0.783) 0.181 (0.835) – 0.615 (0.332)
USA
CO2 Trade Energy FD GDP GDP2 FDI ECT
CO2 – 1.041 (0.365) 0.605 (0.552) 2.315 (0.116) 1.477 (0.2444) 1.413 (0.259) 0.486 (0.619) 0.587*** (0.001)
Trade 1.703 (0.199) – 1.773 (0.187) 7.146*** (0.00) 1.410 (0.259) 1.453 (0.249) 0.038 (0.9622) 0.003 (0.635)
Energy 0.915 (0.411) 0.822 (0.449) – 2.288 (0.101) 3.189* (0.055) 3.051** (0.047) 0.766 (0.473) 0.649*** (0.008)
FD 0.264 (0.769) 0.558 (0.578) 0.429 (0.65) – 0.280 (0.757) 0.141 (0.868) 0.238 (0.789) 0.149 (0.593)
GDP 0.045 (0.95) 5.204** (0.009) 0.683 (0.512) 8.11*** (0.00) – 1.875 (0.169) 3.0387** (0.047) 0.219*** (0.007)
GDP2 1.339 (0.27) 3.946** (0.03) 0.147 (0.863) 5.227** (0.011) 2.726* (0.081) – 0.846 (0.438) 5.579*** (0.000)
FDI 0.463 (0.633) 0.089 (0.914) 2.397* (0.091) 1.400 (0.262) 4.096** (0.026) 1.543 (0.230) – 0.001 (0.154)
South Africa
CO2 Trade Energy GDP GDP2 ECT
CO2 – 0.145 (0.864) 0.205 (0.815) 0.547 (0.583) 0.557 (0.578) 0.061 (0.239)
Trade 0.998 (0.380) – 2.302 (0.116) 0.561 (0.576) 0.573 (0.569) 0.055 (0.636)
Energy 1.454 (0.249) 0.320 (0.728) – 0.699 (0.504) 0.706 (0.501) 0.173 (0.737)
GDP 0.532 (0.592) 0.100 (0.904) 1.094 (0.347) – 0.383 (0.684) 0.312 (0.5416)
S. %
Environmental
No Environmental disclosures indicators C.Y. P.Y. Change degradation
and economic
1 For domestic and foreign companies
(1) Expenditure on commitment towards green supply chain management growth
(2) Expenditure on support from green supply chain management
(3) Expenditure on total quality environment management
(4) Number of environmental and auditing programmes
(5) Tracking environmental information (energy used, water used, air
pollution and toxicity)
2 For strengthening institutional framework of the country
(1) Purchase of environment-friendly labelled product as raw material
(2) Number of suppliers complying with environmental objective
(3) Design of product for reuse, recycle and recovery of material
(4) Design a product by avoiding/reusing hazardous products
(5) Expenditure on waste management
(6) Fine on environmental accidents
(7) Technology upgradation for energy/power saving Table 9.
3 For environmental performance Sample format of
(1) Air emissions per ton environmental
(2) Solid and water waste per tonne/litre disclosure statement
(3) Energy efficiency measures (indicators/
(4) Use of renewable resources (hydro/wind energy) variable) sheet

In China, unidirectional causality running from energy without feedback leads to high
energy-intensive industrial usage and hence high carbon emissions. However, bidirectional
causality was running from GDP and GDP2 to carbon emissions. We also found long-run
causality in financial development equation, running to financial development. Also financial
development Granger was caused by carbon emission, energy and GDP variable in short run
(Boutabba, 2014). In Japan, bidirectional causality was found between trade openness and
carbon emission and unidirectional causality was running from GDP to carbon emissions
which supported the EKC hypothesis. In case of South Africa, we did not find the evidence of
bidirectional causality but a unidirectional causality was running from GDP and trade
openness to carbon emission without feedback in long run (Tiwari et al., 2013). The evidence
of EKC hypothesis was not observed in USA, and unidirectional causality was running from
financial development to carbon emission in long run without feedback (Tamazian and Rao,
2010). In case of Brazil, we found bidirectional causality running from energy to carbon
emission and unidirectional causality was running towards trade openness, energy and GDP
equation in long run. In UK, bidirectional causality was observed running from financial
development to carbon emission (Tamazian and Rao, 2010). However, long-run unidirectional
causality was running towards trade openness, energy and financial development.

5. Discussions
With global warming being a persistent threat, as of 2020, the world is exposed to an ever-
increasing risk of climate change which further affects economic growth of countries. Most
emerging and developing countries are dependent on agriculture and allied activities for their
livelihood and on developed counterparts for their technological needs, hence causing
misbalances in global demand for allied and technological products. In turn, it affects the
manufacturing activities of different industries which further affects world GDP. To mitigate
the negative effects of industrialization, 191 countries have ratified the Kyoto Protocol and
189 have signed the Paris Agreement on carbon emissions and policy initiatives promoting
IJPPM “green financing” and carbon trade. These initiatives help in improving energy efficiency of
industrial sector, increase usage of renewable resources and lower the GHG emissions.

5.1 Theoretical contributions

Based on the results of short- and long-run relationship using ARDL and cointegration
technique, we found a positive relationship between trade openness and carbon emissions
estimated in our models due to lower trade barriers which may lead to environmental
degradation in countries with weaker regulations if heavy polluters move to these countries
(Table 6 and Table 7). This is referred to as pollution haven hypothesis (PHH). Also the
environmental quality may decline through the scale effect as increasing trade volume raises the
size of economy, which increases pollution. The PHH theory postulates that polluting
multinational companies come to countries with lower environmental standards. With respect to
mitigating the adverse environmental concerns related to FDI and trade openness, it is pertinent
for policymakers to frame and implement regulatory mechanisms that are environment-friendly.
Policy dimensions have been categorized using three stances, namely development of financial
institutions, inflow of FDI and strengthening institutional framework. Financial development
policy initiatives offer business modelling framework, investment in efficient infrastructure and
establishment of energy-efficient units. To develop financial sector, government policies must
ensure sustainable financial development and expansion of public private partnerships (PPP). It
is important for the policymakers to frame and introduce policies that create accountability on
the part of public and private players towards environmental protection. Moving to FDI stance,
positive causality (Tables 7 and 8) towards environmental degradation directs policymakers to
pay heed by avoiding pollution haven hypothesis through invasion of coordinated know-how
and clean technological transfers with foreign companies. FDI inflows accompanied by greener
technological progress in turn lead to rapid enhancement in energy efficiency and reduction in
carbon emissions. Foreign investors need to be allowed to invest in developing countries through
transfer of ideas, know-how, advanced technology and managerial skills to domestic firms
which may lead to lowering down CO2 emissions on the one hand and increase in GDP on the
other. Local industries should be encouraged to adopt green development mechanism and
environmental-friendly technology. This would require the countries to adopt alternative
energy-efficient resources across the energy value chain, through installation of renewable
energy plants. Sequence of negotiation agreement on pollutants, abatement technology,
environmental concerns and spillover effects in international environmental agreements include
defined rules for mitigating the negative impact on environmental degradation. These have to be
adopted by implementing a legal framework (Xu, 2018; Biermann et al., 2010). The success of
energy-efficient plants depends on creating unified energy regulations. This not only requires
institutional framework of countries to align with this objective, but also its strengthening by
creating incentives for higher energy-efficient units. Also technological advancement must
support high energy conservation research and development. The development of energy-
efficient policies via green FDI, environmental agreement and regulatory laws leads to reducing
carbon emissions without hampering the economic growth of countries. Since 2012, more than
152 countries have taken important steps to formulate International Investment Agreements
(IIAs) towards SBGs. Many countries have revised their treaties in consultation with UNCTAD’s
Reform Package for international investment regime (UNCTAD [15], 2018). In addition to this,
several alterations have been proposed in accordance to sustainable business environment of
host country especially in developing countries.

5.2 Managerial implications

We further include select mandatory propositions in determining the role of GHG emissions
in host/home country environment, which have never been tested in empirical literature.
We develop an itemized instrument for measuring implementation of environmental Environmental
disclosure index, to be used as a benchmark by companies to improve their mandatory degradation
disclosures. This may also be used by accounting and regulatory bodies which may develop
specific guidelines/standards for reporting such items as well. Such bodies should come up
and economic
with format of environmental disclosure that may be referred to as Environmental Disclosure growth
Statement. Finally the accounting and regulatory bodies may fix a place of reporting of this
information to management in board meetings or in annexure. However, making it a
mandatory statement is essential to ensure compliance. Suggestive environmental disclosure
statement format is listed in Table 9. Such a statement should also include a specific award for
environmental protection and innovative practices towards sustainability.
A well-structured plan on climate change mitigation action is required as an integral part
of sound development plan in developing countries. There is an emergent need to adopt
sustainable business practices, namely environmental-social-governance (ESG) as an integral
part of corporate strategies (Saini and Singhania, 2019), including CSR provisions under IIAs.
As of 2020, corporate social and environmental role of companies towards sustainability
characteristics shall be incorporated as a very important operational requirement on
investment towards the host countries. It includes community development agreements and
OECD guidelines towards environmental sustainability which ensure sustainability to both
present and future generations by meeting their INDC [16] targets and SDG goals to arrest
climate change objective. Xu (2018) analysed the sequence of negotiation agreement on
pollutants, abatement technology, environmental concerns and spillover effects in
international environmental agreements. A defined policy design is another method to
encourage participation in international agreements. Biermann et al. (2010) propose the
concept of Earth System Governance involving formal and informal rules, setting up steering
societies towards preventing, mitigating local environmental change for sustainable
development. In addition, we suggest the need of international financial intermediaries to
keep financing cost low for energy-efficient units and implementation of new carbon taxation
policy for major world polluters.
Claessens and Feijen (2007); Kumbaroglu et al. (2008) and Lanoie et al. (1998) argue that
improved governance, financial sector development through technological changes in energy
supply will spur greater environmental improvement. Institutional arrangements including
non-government arrangements or parliamentary supervision on environmental funds and
releasing annual public reports on its performance are required to be established. A well-
designed financial system provides enough incentives to local firms as well as multinational
enterprises (MNEs) to lower their carbon emissions. In addition, for successful economic and
financial development, there is an emergent need of a strong institutional system to mitigate
the negative effects of industrialization on environment and ecology.
The current study does not consider governance indicators including corruption index,
social indicators, political freedom, financial and institutional framework, research and
development to highlight technique effect, composite effect and scale effect in revisiting EKC
hypothesis.

6. Conclusion and suggestions

We examine long- and short-run relationships between various macro-economic variables
and carbon emissions for seven countries over 50 years. We contribute to literature by
considering two sets of economies, developed and developing with special focus on financial
development and FDI inflows using ARDL methodology incorporating a two-step procedure.
First, we ascertain the established cointegration using ARDL methodology and thereafter the
dynamic ECM is used to determine Granger causality among all variables. Finally, stability
tests using residual analysis are undertaken.
IJPPM Our results support evidence of long-run and short-run causality between per capita
carbon emission, financial development, per capital real GDP and GDP2, energy consumption,
trade openness and FDI. Our most interesting results comprise the relationship between
financial development, FDI and carbon emissions. The results revealed the presence of
positive causality running from financial development and FDI to carbon emission in India.
Accordingly we infer the ineffectiveness of financial development system and presence of
pollution haven hypothesis in Indian context. This is due to the presence of high economic
growth on account of heavy industry development led by financial system and FDI
mechanism. Most developing countries opt for economic growth in their initial stages of
development over environmental aspects due to absence/lack of institutional framework
(Birdsall and Wheeler, 1993; Frankel and Rose, 2002). In such countries, scale effect is
negatively associated with environmental quality due to the absence of strict institutional
framework. Contrary to Indian results, we found a negative association moving from
financial development to carbon emissions in UK representing the effectiveness of financial
development in curbing the negative effects of environmental degradation. UK financial
development system encourages green sustainable financing by providing green credits to
households and industry in order to reduce environmental degradation. Our results highlight
the agenda towards global sustainable development in order to reduce carbon emissions by
providing green credits through financial development and green finance from domestic as
well as foreign funds. Further these green financial credits may be used through inflows of
foreign capital and private financial credits in home countries for energy-efficient policies in
order to curb carbon emissions. In other countries, evidence does not support any significant
impact on carbon emissions as presented in Table 6 and Table 7. Table 8 represents Granger
causality results for all variables with their respective dependent variable equations. A
unidirectional causality is running from energy to carbon emission which highlights the need
for adoption of alternative resources of supply and increase of energy efficiency across the
energy value chain. To mitigate this, countries are looking for renewable sources of energy
and the need to produce in collaborative framework involving private and foreign players
under various free licensing agreements. Whether to accept the EKC hypothesis or not, an
improvement in environmental quality requires some degree of governmental intervention
(Greenstone and Jack, 2015). High GDP raises the government revenues through taxes and
allows more spending on environmental quality. Political pressure by citizens in developed
countries demands higher environmental quality through green budgets. Therefore policy
interventions must impact financial development, foreign capital inflows and energy
efficiency. However, our work is not free from limitations. Although ARDL method considers
the problem of endogeneity, Narayan and Narayan (2010) and Narayan et al. (2016) have
suggested two alternative approaches to estimate EKC hypothesis (without the inclusion of
squared term of income) in a data set by comparing short-run and long-run income elasticity
and cross-correlation estimates to understand how economic growth and carbon emissions
are related to each other. Future studies must validate the effectiveness of EKC hypothesis by
considering approaches suggested by elasticity method by Narayan and Narayan (2010) and
cross-correlation method as advocated by Narayan et al. (2016). In addition, future research
may include usage of Narayan and Popp (2010) as per a newly developed test for unit root test
with single and two unknown structural breaks.

Notes
1. Lau et al. (2018) and Tedesse (2005)
2. There exists an inverted-U-shaped relationship between per capita income (PCI) and environmental
degradation. EKC hypothesize relates economic growth and environmental pollution.
3. https://www.oecd.org/greengrowth/47445613.pdf
 4. World Energy Outlook (2017). Energy Access Outlook 2017: from Poverty to Prosperity (special Environmental
report).
degradation
5. The concept of Kuznets curve which examines the inverted-U-shaped relationship between income and economic
and income inequality was proposed by Simon Kuznets. Later on, this concept was reviewed by
environmental economic literature in the 1990s. growth
6. https://unfccc.int/sites/default/files/resource/UNClimateChange_annualreport2017_final.pdf
7. CO2 time series 1990–2013 per capita for world countries EDGAR Last update: 30/10/2017
8. α2 being positive reveals carbon emission to increase when income increases
9. α3 being negative implies an inverse-U-shaped pattern meaning that once income passes the
threshold limit, the carbon emissions tend to decline
10. Integrated at order 0
11. Integrated at order 1
12. Lag selection is made on the basis of Akaike information (AIC) and the Schwarz–Bayesian
information (SIC) as suggested by Pesaran et al. (2001).
13. Note: The critical value ranges of F-statistics are 2.152–3.296, 2.523–3.829 and 3.402–5.031 at 10, 5
and 1% levels of significance, respectively, which are taken from the Appendix in Narayan (2005).
14. Multiple long-run relationships
15. https://investmentpolicy.unctad.org/international-investment-agreements/model-agreements
16. Intended Nationally Determined Contributions (INDC) are voluntary national targets adopted by
nations to meet the objectives set by UNFCCC under Paris Agreement in 2015, to hold the increase in
global average temperature to below 2 8Celsius.
17. Austria, Belgium, Czech Republic, France, Greece, Hungary, Iceland, Ireland, Luxembourg, Poland,
Portugal, Slovakia and Spain.
18. At Trend and Intercept

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Corresponding author
Neha Saini can be contacted at: nehasaini.phd@fms.edu

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