The impact of globalization and financial development on environmental quality: evidence from selected countries in the Organization for Economic Co-operation and Development (OECD).

Abstract

This study investigates the impacts of globalization and financial development on environmental quality by incorporating energy consumption in the framework of the Environmental Kuznets Curve (EKC) hypothesis for selected countries in the Organization for Economic Co-operation and Development (OECD) over the 1990-2014 time spans. The cross-sectional dependence is determined by using the cross-sectional dependence and Lagrange Multiplier (LM) methods. This study employs second-generation panel unit root tests to check the unit root properties and the Westerlund panel cointegration test to examine the long-run equilibrium relationship among the variables. The results confirm the presence of cointegration in the long run. The Continuously Updated Fully Modified Ordinary Least Square (CUP-FM) and Continuously Updated Bias-Corrected (CUP-BC) approaches are applied to investigate long-term output elasticities of the variables. The results show the stimulating role of energy consumption on Carbon dioxide (CO2) emissions. This study finds support for the EKC hypothesis as it relates to selected OECD countries. Globalization and financial development increase environmental quality by reducing CO2 emissions. The causal relationship reveals the presence of a bidirectional relationship between energy consumption and CO2 emissions. The feedback causal effect runs between economic growth and CO2 emissions and between globalization and economic growth, while unidirectional causality runs from CO2 emissions to financial development, from economic growth to energy consumption, from energy consumption to financial development, from globalization to energy consumption, and from globalization to financial development. Policies that support green technology transfer among OECD countries, foreign direct investment in the renewable energy sector, financial development to support green infrastructure, and energy generation using renewable energy sources are recommended.