Nexus between financial development, energy consumption, income level, and ecological footprint in CEE countries: do human capital and biocapacity matter?

Abstract

In recent decades, climate change and environmental pollution have been at the center of global environmental debates. Nowadays, researchers have turned their attention to the linkage between real output and environmental quality and test the environmental Kuznets curve. Majority of the studies focus on a single pollutant aspect and measure the deterioration of the environment through carbon emission (CO2) only. In contrary, the current study uses a comprehensive proxy, ecological footprint, to measure the environmental quality of the sixteen Central and Eastern European Countries (CEECs). The aim of this paper is to discover the impact of financial development, economic growth, and energy consumption (renewable and non-renewable) on the environment. In addition, for the first time, the current study includes biocapacity and human capital in the growth-energy-environment nexus in the case of CEECs. In doing so, we used annual data of sixteen CEE countries in perspective of the One Belt One Road (OBOR) initiative and cover the period of 1991-2014. For reliable findings, this study focuses on second-generation econometric approaches to check stationarity, cross-sectional dependency, and co-integration among the model parameters. The long-run estimations of the "Dynamic Seemingly Unrelated-co-integration Regression" (DSUR) signify that the effect of economic growth on ecological footprint is not stable and validate N-shaped relationship for cubic functional form between per capita income and ecological footprint (environmental quality). Empirical evidence divulges that financial development and energy use significantly contribute to environmental degradation while renewable energy improves environmental quality by declining ecological footprint significantly. Moreover, the significant effects of biocapacity and human capital are positive and negative on the ecological footprint, respectively. In robustness check through the "Feasible Generalized Least Square" (FGLS) and "Generalized Method of Moment" (GMM) models, we found consistent result. Lastly, the "Dumitrescu-Hurlin (D-H) Panel Causality Test" demonstrates that two-way causal relationship exists between EF and GDP, EF and FD, EF and EU, EF and BC, and EF and HC, while one-way causality is running from RE to EF. This study puts the present scenario of CEE economies in front of the policymakers and suggests that they should consider the vital role of renewable energy and human capital to get sustainability.