Environmental degradation has severely affected the natural cycle of ecosystem. It's high time now and humans should execute strategies effectively to protect the further degradation. Initially, we need to understand the ways that might affect the environment. Thus, existing research is designed to explore the nonlinear association between financial development (FD) and carbon dioxide emissions (CO2) in the context of low-income countries by employing the yearly data of 1990-2016. The panel smooth transition regression model (PSTR) is applied, and the result confirmed that the nexus between the two variables are nonlinear. Moreover, it also shows that at a low regime, FD increases the CO2 emissions but as the economy of low-income states progress to the high regime, the association between the two variables becomes negative and significant. The study also confirms that FD can reduce CO2 emissions once it reaches a certain threshold point. Based on these findings, new insights are provided for the policymakers, and several policies are suggested to improve the environmental quality in low-income countries.
Keywords: CO2 emissions; Financial development; International trade; Low-income countries; PSTR.