Does institutional quality really matter for environmental quality?

Abstract

In this paper, we introduce a new innovation into the institutions and environmental degradation nexus debate, by placing emphasis on institutional quality (good or poor) in the modelling framework, a clear departure from the existing literature that makes no such distinctions when using institutions to investigate the nexus. Using a panel of 163 countries, and applying a system generalised method of moment technique, we obtained robust evidence that the quality of institutions really matters in protecting the environment. In particular, we found that countries with strong institutions could significantly reduce environmental pollution by limiting fossil fuel consumption, while those with poor institutions would worsen the situation. Countries with strong institutions were also found to be able to curtail environmental problems in densely populated cities than those with weak institutions. The policy implications arising from the study are clear – strengthening the quality of domestic institutions that relate to environmental policy formulation and regulation, is critical to delivering a cleaner environment.