Environmental degradation and economic growth: Investigating linkages and potential pathways

Abstract

Concerns about the incessant rise in emissions and their attendant effects on climate change, which is ravaging the globe, are on the ascendency. The literature has almost concluded that economic activities and growth contribute significantly to environmental degradation. Despite the plethora of studies on the effect of economic growth on environmental degradation, empirical studies examining the reverse – i.e., how environmental degradation affects economic growth – are limited. However, the associated literature postulates that attaining economic growth is accompanied by increased environmental degradation. To guide the development of non-conflicting environmental and structural policies, this study examines whether the rise in environmental degradation is associated with economic growth. It also examines the potential channels through which environmental degradation could affect economic growth. Using a global panel comprising 140 countries from 1980 to 2021 and the two-step dynamic system-generalized method of moment technique to control endogeneity, the findings generally indicate a retarding effect of environmental degradation on economic growth. Further analysis, however, reveals that emissions exhibit an inverted U-shaped relationship with economic growth. However, ecological footprint indicators of environmental degradation have a U-shaped relationship with economic growth. Pathway analysis highlighted that health, foreign direct investment, and technological innovation are the potential channels through which environmental degradation could retard economic growth. The policy implications are discussed.