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The financial development-environmental degradation nexus in the United Arab Emirates: the importance of growth, globalization and structural breaks

Abstract

This article revisits the nexus between financial development and environmental degradation by incorporating economic growth, electricity consumption and economic globalization in the CO2 emissions function for the period 1975QI–2014QIV in the United Arab Emirates. We apply structural break and cointegration tests to examine unit root and cointegration between the variables. Further, the article also uses the Toda-Yamamoto causality test to investigate the causal relationship between the variables and tests the linkages of the robustness of causality by following the innovative accounting approach. Our empirical analysis shows cointegration between the series. Financial development increases CO2 emissions. Economic growth is positively linked with environmental degradation. Electricity consumption improves environmental quality. Economic globalization affects CO2 emissions negatively. The relationship between financial development and CO2 emissions is U-shaped and inverted N-shaped. Further, financial development leads to environmental degradation, and environmental degradation in turn leads to financial development in the Granger sense.

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Notes

  1. 1.

    Todorova, V. (2015). ‘UAE released 200 m tonnes of greenhouse gases in 2013’, The National, UAE. January: http://www.thenational.ae/uae/environment/uae-released-200m-tonnes-of-greenhouse-gases-in-2013

  2. 2.

    Embassy of the UAE in Washington (2015). Energy in the UAE: http://www.uae-embassy.org/uae/energy/energy-and-climate-change

  3. 3.

    The authors reported a N-shaped relationship between economic growth and CO2 emissions.

  4. 4.

    We converted real domestic credit to the private sector, liquid liabilities, domestic credit provided by the financial sector, stock market capitalization of listed companies and the total value of stocks traded into per capita units before processing for generating the financial development index.

  5. 5.

    UAE Interact (2015). ‘Environment Minister Releases first Reports on State of Green Investment for Banks and Financial Institutions in UAE’, November: http://www.uaeinteract.com/docs/Environment_Minister_releases_first_report_on_state_of_green_investment_for_bank_and_financial_institutions_in_UAE/72411.htm

  6. 6.

    AIC suggests that a maximum of lag 6 is suitable. The results are available on request from the authors.

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Correspondence to Ilham Haouas.

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Shahbaz, M., Haouas, I., Sohag, K. et al. The financial development-environmental degradation nexus in the United Arab Emirates: the importance of growth, globalization and structural breaks. Environ Sci Pollut Res (2020). https://doi.org/10.1007/s11356-019-07085-8

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Keywords

  • Financial development
  • Environment
  • Growth
  • Electricity
  • Globalization