Analyzing financial and economic development thresholds for carbon emission reduction: a dynamic panel regime-switching study across income levels

Abstract

Purpose

This research investigates the threshold effects of the interplay between finance, development and carbon emissions across 97 countries, including 50 low-income and 47 high-income countries, during the period from 1991 to 2019.

Design/methodology/approach

Employing various econometric modeling techniques such as dynamic linear regression, dynamic panel threshold regression and in/out of sample splitting, this study analyzes the data obtained from the World Bank's world development indicators.

Findings

The results indicate that low-income countries require a minimum financial development threshold of 0.354 to effectively reduce carbon emissions. Conversely, high-income countries require a higher financial development threshold of 0.662 to mitigate finance-induced carbon emissions. These findings validate the presence of a finance-led Environmental Kuznet Curve (EKC). Furthermore, the study highlights those high-income countries exhibit greater environmental concern compared to their low-income counterparts. Additionally, a minimum GDP per capita of US$ 10,067 is necessary to facilitate economic development and subsequently reduce carbon emissions. Once GDP per capita surpasses this threshold, a rise in economic development by a certain percentage could lead to a 0.96% reduction in carbon emissions across all income levels.

Originality/value

This study provides a novel contribution by estimating practical financial and economic thresholds essential for reducing carbon emissions within countries at varying levels of development.

Citation

Yiadom, E.B., Mensah, L., Bokpin, G.A. and Dziwornu, R.K. (2024), "Analyzing financial and economic development thresholds for carbon emission reduction: a dynamic panel regime-switching study across income levels", Management of Environmental Quality, Vol. 35 No. 1, pp. 18-37. https://doi.org/10.1108/MEQ-12-2022-0338