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.
This is a preview of subscription content, log in to check access.
Buy single article
Instant unlimited access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
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
Embassy of the UAE in Washington (2015). Energy in the UAE: http://www.uae-embassy.org/uae/energy/energy-and-climate-change
The authors reported a N-shaped relationship between economic growth and CO2 emissions.
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.
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
AIC suggests that a maximum of lag 6 is suitable. The results are available on request from the authors.
Ali S, Waqas H, Ahmad N (2015) Analyzing the dynamics of energy consumption, liberalization, financial development, poverty and carbon emissions in Pakistan. J Appl Environ Biol Sci 5:66–183
Al-Mulali U, Sab CNBC (2012) The impact of energy consumption and CO2 emission on the economic growth and financial development in the Sub Saharan African countries. Energy 39:180–186
Al-Mulali U, Ozturk I, Lean HH (2015a) The influence of economic growth, urbanization, trade openness, financial development, and renewable energy on pollution in Europe. Nat Hazards 79:621–644
Al-Mulali U, Tang CF, Ozturk I (2015b) Does financial development reduce environmental degradation? Evidence from a panel study of 129 countries, 22, 14891-14900
Anderson D (1992) Economic growth and the environment. World Bank Policy Research Working Paper, 979. The World Bank, Washington, DC
Antle JM, Heidebrink G (1995) Environment and development: theory and international evidence. Econ Dev Cult Chang 43(3):603–625
Boutabba MA (2014) The impact of financial development, income, energy and trade on carbon emissions: evidence from the Indian economy. Econ Model 40:33–41
Charfeddine L, Khediri KB (2015) Financial development and environmental quality in UAE: cointegration with structural breaks. Renew Sust Energ Rev 55:1322–1335
Claessens S, Feijen E (2007) Financial sector development and the millennium development goals, World Bank Working Paper No. 89. The World Bank
Copeland B, Taylor MS (2004) Trade, growth and the environment. J Econ Lit 42(1):7–71
Dasgupta S, Laplante B, Mamingi N (2001) Pollution and capital markets in developing countries. J Environ Econ Manag 42(3):310–335
Dasgupta S, Laplante B, Wang H, Wheeler D (2002) Confronting the environmental Kuznets curve. J Econ Perspect 16(1):147–168
De Bruyn SM, Heintz RJ (1999) The environmental Kuznets curve hypothesis. Handbook of Environmental and resource economics. Edward Elgar, Cheltenham, pp 656–677
Deloitte and Dubai Economic Council (2014) Financial sector development for promoting investment and sustainable growth in Dubai. Report, March. http://www2.deloitte.com/content/dam/Deloitte/xe/Documents/finance/me_DEC_%20Report_23122014.pdf
Dickey D, Fuller WA (1979) Distribution of the estimates for autoregressive time series with unit root. J Am Stat Assoc 74:427–431
Dinda S (2004) Environmental Kuznets curve hypothesis: a survey. Ecol Econ 49(4):431–455
Dreher A (2006) Does globalization affect growth? Evidence from a new index of globalization. Appl Econ 38(10):1091–1110
Elliot G, Rothenberg TJ, Stock JH (1996) Efficient tests for an autoregressive unit root. Econometrica 64:813–836
Embassy of the UAE in Washington (2015) Energy in the UAE. http://www.uae-embassy.org/uae/energy/energy-and-climate-change
Engle RF, Granger CWJ (1987) Cointegration and error correction: representation, estimation and testing. Econometrica 55:251–276
Frankel JA, Romer DH (1999) Does trade cause growth? Am Econ Rev 89(3):379–399
Granger CWJ (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37:424–438
Gregory AW, Hansen BE (1996) Residual-based tests for cointegration in models with regime shifts. J Econ 70:99–126
Grossman G, Krueger A (1995) Economic environment and the economic growth. Q J Econ 110:353–377
Grove RH (1992) Origins of western environmentalism. Sci Am 267(1):42–47
Gujrati DN (1995) Basic econometrics, 3rd edn. McGraw-Hill Inc.
Gurgul H, Lach Ł (2014) Globalization and economic growth: evidence from two decades of transition in CEE. Econ Model 36:99–107
Halicioglu F (2009) An econometric study of CO2 emissions, energy consumption, income and foreign trade in Turkey. Energy Policy 37(3):1156–1164
Hansen BE (1992) Tests for parameter instability in regression with I(1) process. J Bus Econ Stat 10:321–335
Jalil A, Feridun M (2011) The impact of growth, energy and financial development on the environment in China: a cointegration analysis. Energy Econ 33:284–291
Jammazi R, Aloui C (2015) On the interplay between energy consumption, economic growth and CO2 emission nexus in the GCC countries: a comparative analysis through wavelet approaches. Renew Sustain Econ Rev 51:1737–1751
Javid M, Sharif F (2016) Environmental Kuznets curve and financial development in Pakistan. Renew Sust Energ Rev 54:406–414
Kolstad CD, Krautkraemer JA (1993) Natural resource use and the environment. In: Kneese AV, Sweeney JL (eds) Handbook of Natural Resources and Energy Economics, vol. III. Elsevier Science Publishers, pp 1219–1265
Kuznets S (1955) Economic growth and income inequality. Am Econ Rev 45:1–28
Kwiatkowski D, Phillips P, Schmidt P, Shin Y (1992) Testing the null hypothesis of stationary against the alternative of a unit root: how sure are we that economic time series have a unit root? J Econ 54:159–178
Leitão NC (2014) Economic growth, carbon dioxide emissions, renewable energy and globalization. Int J Energy Econ Policy 4(3):391–399
Meadows DH, Meadows DL, Randers J, Behrens W (1992) The limits to growth. Universe Books, New York
Ng S, Perron P (2001) Lag length selection and the construction of unit root test with good size and power. Econometrica 69:1519–1554
Omri A (2013) CO2 emissions, energy consumption and economic growth nexus in MENA countries: Evidence from simultaneous equations models. Energy Econ 40:657–664
Omri A, Daly S, Rault C, Chaibi A (2015) Financial development, environmental quality, trade and economic growth: what causes what in MENA countries. Energy Econ 48:242–252
Ozturk I, Acaravci A (2013) The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Econ 36:262–267
Phillips PCB, Ouliaris S (1990) Asymptotic properties of residual based tests of cointegration. Econometrica 58:165–193
Phillips PCB, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75:335–346
Rambaldi AN, Doran HE (1996) Testing for Granger non-causality in cointegrated systems made easy, Working Papers in Econometrics and Applied Statistics, Department of Econometrics, The University of New England, No.88, 22 pages
Sadorsky P (2010) The impact of financial development on energy consumption in emerging economies. Energy Policy 38:2528–2535
Salahuddin M, Gow J, Ozturk I (2015) Is the long-run relationship between economic growth, electricity consumption, carbon dioxide emissions and financial development in Gulf Cooperation Council Countries robust? Renew Sust Energ Rev 51:317–326
Sbia R, Shahbaz M, Hamdi H, Ozturk I (2014) Economic growth, electricity consumption, urbanization and environmental degradation relationship in United Arab Emirates. Ecol Indic 45:622–631
Selden TM, Song D (1994) Environmental quality and development: is there a Kuznets curve for air pollution emission? J Environ Econ Manag 27(2):147–162
Sengupta R (1996) Economic development and CO2 emission: economy-environment relationship and policy approach for the choice of emissions standard. Institute for Economic Development, Boston University, Boston
Shafik NT (1994) Economic development and environmental quality: an econometric analysis. Oxf Econ Pap 46:757–773
Shahbaz M, Tiwari AK, Nasir M (2013a) The effects of financial development, economic growth, coal consumption and trade openness on CO2 emissions in South Africa. Energy Policy 61:1452–1459
Shahbaz M, Hye MQA, Tiwari AK, Leitão NC (2013b) Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renew Sust Energ Rev 25:109–121
Shahbaz M, Uddin GS, Rehman I, Imran K (2014) Industrialization, electricity consumption and CO2 emissions in Bangladesh. Renew Sust Energ Rev 31:575–586
Shahbaz M, Mallick H, Mahalik MK, Loganathan MN (2015a) Does globalization impede environmental quality in India? Ecol Indic 52:379–393
Shahbaz M, Jam FA, Bibi S, Loganathan N (2015b) Multivariate granger causality between CO2 emissions, energy intensity and economic growth in Portugal: evidence from cointegration and causality analysis. Technol Econ Dev Econ. https://doi.org/10.3846/20294913.2014.989932
Shahbaz M, Farhani S, Ozturk I (2015c) Do coal consumption and industrial development increase environmental degradation in China and India? Environ Sci Pollut Res 22:3895–3907
Tamazian A, Rao BB (2010) Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Econ 32:137–145
Tamazian A, Chousa JP, Vadlamannati KC (2009) Does higher economic and financial development lead to environmental degradation: evidence from BRIC countries. Energy Policy 37:246–253
Toda HY, Yamamatoo T (1995) Statistical inference in vector autoregression with possibly integrated process. J Econ 66:225–250
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
UAE Interact (2015) Environment Minister Releases first Reports on State of Green Investment for Bank and Financial Institution 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
United Nations (2014) World Urbanization Prospects.http://esa.un.org/unpd/wup/highlights/wup2014-highlights.pdf
World Development Indicators (CD-ROM) (2015) World Bank, https://www.worldbank.org.
World Economic Forum (2012) The Financial Development Report 2012. http://www3.weforum.org/docs/WEF_FinancialDevelopmentReport_2012.pdf
Zhang YJ (2011) The impact of financial development on carbon emissions: an empirical analysis in China. Energy Policy 39:2197–2203
Zivot E, Andrews D (1992) Further evidence of great crash, the oil price shock and unit root hypothesis. J Bus Econ Stat 10:251–270
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Responsible editor: Philippe Garrigues
About this article
Cite this article
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
- Financial development