Foreign finance, economic growth and CO2 emissions Nexus in OECD countries

• DOI: https://doi.org/10.1108/IJCCSM-12-2018-0082
• Date: 14 August 2019
• Pages: 161-181
• Published date: 14 August 2019
• Author: Faris Alshubiri,Mohamed Elheddad
• Subject Matter: Public policy & environmental management

Foreign f‌inance, economic growth

and CO

2

emissions Nexus in

OECD countries

Faris Alshubiri

Dhofar University, Salalah, Oman, and

Mohamed Elheddad

Hull University Business School, Hull, UK

Abstract

Purpose –This study aims to examinethe relationship between foreign f‌inance,economic growth and CO

2

to investigate if the environmental Kuznets curve (EKC) exists as an empirical evidence in 32 selected

Organizationfor Economic Co-operation and Development (OECD) countries.

Design/methodology/approach –This study used quantitativeanalysis to test two main hypotheses: H1 is

the U-shape relationship between foreign f‌inance and environment, and H2 is the N-shaped association between

economic growth and environment. In doing so, this study used panel data techniques. The panel set contained 32

countries over the period from 1990 to 2015, with 27 observations for each country. This study applied a panel OLS

estimator via f‌ixed-effects control to address heterogeneity and mitigate endogeneity. Generalized method of

moments (GMM) with f‌ixed effects-instrumental variables(FE-IV) and diagnostic tests were also used.

Findings –The results showed that foreign f‌inance and environmental quality have an inverted U-shaped

association. The three proxies’foreign investment, foreignassetsandremittanceinthef‌irst stages contribute

signif‌icantly to CO

2

emissions, but after the threshold point is reached, these proxies become “environmentally

friendly”by their contribution to reducing CO

2

emissions. Also, a non-linear relationship denotes that foreign

investment in OECD countries enhances the importance, as a proxy of foreign f‌inance has greater environmental

quality than foreign assets. Additionally, empirical results show that remittances received is linked to the highest

polluted levels until a threshold point is reached, at which point it then helps reduce CO

2

emissions. The GMM and

FE-IV results provide robust evidence on inverse U-shaped relationship, while the N-shaped relationship explains

thateconomicgrowthproducesmoreCO

2

emissions at the f‌irst phase of growth, but the quadratic term conf‌irms

this effect is negative after a specif‌ic level of GDP is reached. Then, this economic growth makes the environment

deteriorate. These results are robust even after controlling for the omitted variable issue. The IV-FE results indicate

an N-shaped relationship in the OECD countries.

Practical implications –Most studies have used different economicindicators as proxies to show the

effects of these indicators on the environment, but they are f‌lawedand outdated regarding the large social

challenges facing contemporary, socio-f‌inancial economic systems. To overcome these disadvantages, the

social, institutional and environmental aspects of economic development should also be considered. Hence,

this study aimsto explain this issue as a relationship with several proxiesin regard to environmental, foreign

f‌inance and economicaspects.

Originality/value –This paper uses updated data sets for analyzing the relationship between foreign

f‌inance and economic growth as a new proxy for pollution. Also, this study simulates the f‌inancial and

environmental future to show their effect on investments in different OECD countries. While this study

© Faris Alshubiri and Mohamed Elheddad. Published by Emerald Publishing Limited. This article is

published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,

distribute, translate and create derivative works of this article (for both commercial and non-

commercial purposes), subject to full attribution to the original publication and authors. The full

terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

This paper forms part of a special section “Global Green Climate Finance: Challenges of

Fragmentation and Complexity”.

OECD

countries

161

Received11 December 2018

Revised16 May 2019

Accepted20 June 2019

InternationalJournal of Climate

ChangeStrategies and

Management

Vol.12 No. 2, 2020

pp. 161-181

EmeraldPublishing Limited

1756-8692

DOI 10.1108/IJCCSM-12-2018-0082

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1756-8692.htm

enhances the literatureby establishing an innovative control during analysis,this will increase to add value.

This study is among the few studies that empiricallyinvestigate the non-linear relationship between f‌inance

and environmentaldegradation.

Keywords Economic growth, CO

2

emissions, OECD countries, Foreign f‌inance

Paper type Research paper

1. Introduction

The economic growth activitiesof different countries affect global CO

2

emissions. This has

led to several countries aiming to obtain clean energy and therefore shift environmental

policy focus toward greenhouse gas emissions (GHGs), which has caused a rapid

transformation on economy (Pegkas, 2015). This has become evident through several

countries’adoption of sustainable development and has instigated a change in strategy

regarding the management of environmental resources (Paramati et al.,2017). Economic

factors that can help achieve a clean environment include reducing capital costs and

increasing foreignassets (Al Mamun et al.,2018).

Climate f‌inancing refers to resources that promote resilient development by allocating

f‌inances to create conditions that support the adaptation and mitigation of a negative

climate impact and promotescientif‌ic research using modern climate f‌inancing technologies

(Fernandes and Paunov, 2012). Sustainablef‌inancing continues to attract signif‌icant global

attention in regard to funding environmental and infrastructural initiatives effective

f‌inancing (Maddisonand Rehdanz, 2008).

The magnitude of the climate change challenge is important to the international

community and requires ref‌lection on pre-industrial production levels and consumption

processes to encourage countries to adopt policies that stimulate investment and address

possible climate change(Galeotti et al.,2009).

In this context, governmentsin different countries need to provide companiessubstantial

support to adapt of environment changes, especially in developing countries, which are

directly affected by the accumulation of buried gases in the atmosphere (Salahuddin et al.,

2018). Hence, the magnitude of the f‌iscal challenge to achieve this transformation makes it

diff‌icult for climate f‌inancing to absorbresources, which is also dependent on the resources

available to each country (Akbostanciet al., 2009). Specif‌ically, developing countrieslack the

necessary f‌inancial resources, institutional and policy systems and skills to effectively

f‌inance climate initiatives(Pao and Tsai, 2011).

Climate change is a highly inconsistent development issue with unbalanced effects

according to a country’s income development pathways (Hao and Liu, 2015). These effects

are unbalanced because it islikely that climate change damage will be more severe in lower-

income countries (Ozturkand Acaravci, 2010).

Therefore, high-income countries have aimed to aid developing countries in reducing

negative climatechange impacts via the establishment of the Green Climate Fund and

f‌inancing technology (Maddison and Rehdanz, 2008). However, the slow growth of climate

f‌inancing in these countries has created a challenge regarding scientif‌icf‌inancial targets

(Zhang and Zhou, 2016).

The threat of climate change raises diff‌icultquestions regarding how to implement them

and what infrastructurewill be developed (Alfaro et al., 2004). Many countries have begunto

propose policies thatstabilize current emission levels to achieve a cleanenvironment, which

includes the costs of mitigationand adaptation (Wang, 2009).

These countries also strategize on howto share the burden of funding based on country

pollution levels that have caused current damage (Lee, 2009). Acharyya (2009) sought to

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