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Heterogeneous effects of economic policy uncertainty and foreign direct investment on environmental quality: cross-country evidence

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Abstract

Over the last few years, global warming and rapid climate change have become major risk factors that pose a serious threat to global security. A key factor behind these risk factors is greenhouse gases, which emit mainly carbon dioxide (CO2). The existing literature seeks to determine the economic and non-economic aspects of CO2 emissions to prevent environmental degradation. However, the effects of economic policy uncertainty and foreign direct investment on CO2 emissions are undeniable. This study examines the impact of economic policy uncertainty and foreign direct investment on CO2 emissions in the panel of 24 developed and developing nations from 2001 to 2019. After verifying cross-sectional dependency and co-integration among parameters, the dynamic seemingly unrelated regression and panel vector error correction model (VECM) Granger causality methods are used for long-run estimates and verify the causal link among variables. Our findings show that economic policy uncertainty, economic growth, trade, and energy consumption adversely impact the environment, while foreign direct investment enhances sample countries’ environmental quality. Furthermore, a bidirectional relationship exists between CO2, economic policy uncertainty, economic growth, trade, and energy consumption. In addition, this study observed similar results in a robustness analysis using the dynamic common correlated effects and fixed effect panel quantile regression frameworks. Based on the inclusive outcomes, this study forms significant suggestions for policy implications. Specifically, policymakers should design environmental-friendly trade policies, explore renewable energy options, and implement green investment and financing strategies to improve the environment.

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Data availability

The data relevant to this research is publicly available from the World Development Indicators or obtained from the authors by making a reasonable request.

Notes

  1. “Record annual increase of carbon dioxide observed at Mauna Loa for 2015”. NOAA.9 March 9, 2016

  2. “CO2 levels make largest recorded annual leap, Noaa data shows” The Guardian, March 10, 2016, Retrieved March 14, 2016

  3. Name of the countries: Australia, Brazil, Canada, Chile, China, Colombia, Croatia, France, Germany, Greece, Hong Kong, India, Ireland, Italy, Japan, Mexico, Netherlands, Russia, Singapore, South Korea, Spain, Sweden, the UK, and the USA

  4. All economic policy uncertainty indices are taken from https://www.policyuncertainty.com.

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Authors and Affiliations

  1. School of Economics, Shandong University of Finance and Economics, Jinan, China

    Mohsin Shabir & Satar Bakhsh

  2. School of Economics, Zhongnan University of Economics and Law, Wuhan, China

    Minhaj Ali

  3. School of Economics, Huazhong University of Science and Technology, Wuhan, Hubei, China

    Shujahat Haider Hashmi

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  1. Mohsin Shabir
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  2. Minhaj Ali
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  3. Shujahat Haider Hashmi
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  4. Satar Bakhsh
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Contributions

Mohsin Shabir: Conceptualization of the study, sample preparation, and manuscript preparation. Minhaj Ali: Methodology, formal analysis, and constructive discussions. Shujahat Haider Hashmi: Supervision and method validation. Satar Bakhsh: Sample preparation, method validation, and writing-review and editing.

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Shabir, ., Ali, M., Hashmi, S.H. et al. Heterogeneous effects of economic policy uncertainty and foreign direct investment on environmental quality: cross-country evidence. Environ Sci Pollut Res 29, 2737–2752 (2022). https://doi.org/10.1007/s11356-021-15715-3

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