From finance to sustainability: Understanding the financial development-environment nexus with the environmental Kuznets curve in East-Asia and Pacific economies

Abstract

This study examines the effect of financial development on environmental quality in East Asia and the Pacific (EP) countries from 1995 to 2020. A unique technique, Dynamic Common Correlated Effects, is utilized to resolve cross-sectional dependence and heterogeneity. The Pooled Mean Group technique is also applied to verify the robustness of the results. The long-run analysis confirms financial development's positive and significant impact on CO2 and CH4 emissions while exhibiting an inverse impact on ecological footprint and N2O emissions in overall and developed EP countries. The study confirms the presence of an inverted U-shaped environmental Kuznets curve (EKC) when analyzing ecological footprint, CO2, and CH4 across all groups of selected countries. However, for N2O emissions, a U-shaped EKC pattern emerges specifically in less-developed and overall EP economies. It is proposed that governments of EP economies should maintain financial development while promoting sustainable environmental management to address climate challenges.