Impact of Economic and Financial Development on Environmental Degradation: Evidence from Small Island Developing States (SIDS)

ABSTRACT

The aim of this study is to investigate the effect of economic and financial development (FD) on environmental degradation (ED) for a sample of 12 selected small island developing states for the period 2000–2016 using a panel vector autoregressive model which accounts for the issue of dynamism and endogeneity. Results from the long-run cointegration analysis confirmed that GDP per capita has a negative and significant impact on emissions implying that higher degree of economic development decreases the ED for our sample of island economies. The smaller long-run income elasticity as compared to the short run validates the environment Kuznets curve hypothesis. Although an insignificant impact of FD on CO₂ emissions is reported, the joint effect of economic and FD on the environment indicates that FD will have an affirmative influence on the environment with island economies attaining a relatively good income level as well.

KEY WORDS:

• environmental degradation
• financial development
• PVAR