Unraveling the non-linear impact of financial development on environmental sustainability: insights from developing countries agreeing the accord.

Abstract

This study delves into the intricate relationship between financial development and environmental sustainability by considering the role of the Paris Agreement in the context of developing countries. By employing advanced econometric techniques method of moment quantile regression (MMQR) and considering a period spanning from 1996 to 2021, this research unravels the non-linear impact of financial development on environmental degradation while considering population and GDP as control variables. The study reveals an inverted N-shaped relationship between financial development and environmental degradation, indicating that environmental degradation (ED) decreases as financial development increases. However, this is followed by a rise in ED before eventually witnessing a further decline. Additionally, the study highlights the positive correlation between GDP and population with ED across all quantiles, with a more pronounced impact observed in higher quantiles. Furthermore, the coefficient of the Paris Agreement demonstrates its effectiveness in decreasing environmental degradation, particularly at higher quantiles of ED. The findings of this study hold practical implications for policymakers, emphasizing the importance of designing and implementing coherent environmental and economic policies in developing countries. This study contributes to understanding the complex dynamics between financial development and environmental sustainability, offering valuable insights for fostering sustainable development pathways.