Does financial and economic expansion allow for environmental sustainability? Fresh insights from a new composite index and PSTR analysis

Abstract

Despite the use of different environmental proxies, the economic and financial development (FD)-environmental quality (EQ) nexus is still enigmatic. In this regard, a new composite environmental quality index (CEQI) is used to holistically represent EQ. Moreover, the Panel Smooth Transition Regression (PSTR) method is applied to estimate the Environmental Kuznets Curve (EKC) and the financial development Kuznets Curve (FKC) hypotheses using data from 13 members of the Organization of the Petroleum Exporting Countries (OPEC). The findings reveal that economic growth in the first regime positively affects CEQI while having a negative effect after exceeding the threshold and entering the second regime. Also, FD positively affects CEQI for the first regime and has a negative influence for the second regime. Other factors such as energy consumption and composite trade share (CTS) in both the first and second regimes have a negative effect on CEQI. Accordingly, several environmental quality-improving policies are recommended.

Keywords:

• environmental indicators
• composite environmental quality index
• environmental Kuznets curve
• financial development Kuznets curve
• PSTR model

Disclosure statement

No potential conflict of interest was reported by the authors.

Authors’ contributions

HAF wrote the manuscript, read and approved its final version. MM wrote the manuscript, conducted the analysis, and revised the final version of the manuscript.

Availability of data and materials

The datasets used and/or analyzed during the current study are available from the corresponding author upon reasonable request.

Notes

1 See https://data.worldbank.org

2 See https://epi.envirocenter.yale.edu/