Taking Venezuela back to the sustainability path: The role of financial development and economic integration in low‐carbon transition

Abstract

AbstractEnvironmental protection and sustainable development are connected. Such connection is considered highly important for Venezuela, where fossil fuel abundance has created economic and environmental challenges. Surprisingly, only limited attention has been directed to identifying policy options for charting the path to sustainable development in the economy. Contributing to filling this gap in the literature, this study examines whether financial development, de facto and de jure conditions in trade and financial integration can trigger long‐term economic shifts that will change the trajectory of carbon dioxide (CO2) emissions in the economy using a novel estimation approach—dynamic simulations of autoregressive distributed lag (ARDL) models. The empirical modelling framework incorporates the impact of population, economic growth, energy intensity and government consumption expenditure. ARDL‐bounds test provides evidence that the variables are cointegrated. Long‐run estimates from the dynamic ARDL analysis show that de facto and de jure conditions in trade and financial components of economic integration offer varied policy options for carbon mitigation in Venezuela. Population size, energy intensity, government consumption expenditure and de facto condition in financial integration have increasing impact on CO2 emissions, exacerbating suitability challenges in the economy. On the other hand, positive shocks in financial development, de facto condition in trade integration and de jure condition in financial integration have a mitigation effect on CO2 emissions. Overall, financial development, trade integration and the control of cross‐border financial flows are needed economic conditions that can accelerate a quick transition to a low‐carbon develpoment in Venezuela.