On the link between shadow economy and carbon dioxide emissions: an analysis of homogeneous groups of countries

Abstract

In the framework of an environmental Kuznets curve, the linkage between shadow economy and carbon dioxide (CO₂) emissions was evaluated for 145 countries from 1991 to 2017. In assessing the effect of the shadow economy on CO₂ emissions, we used panel quantile regression, panel fixed effects, and panel smooth transition regression as estimation methods. In addition, to deal with parameter heterogeneity, we resorted to the procedure of Lin and Ng (2012). We found two country groups that share homogeneous parameters. No environmental Kuznets curve was found for the set of all countries. Nevertheless, one was found for each of the homogeneous parameter country groups. This result supports different turning points for different groups of countries. Shadow economy contributed to reducing CO₂ emissions in group 1 and aggravated it in group 2. Manufacturing was revealed to be statistically significant for the countries of group 1. Fossil fuel rents increased the CO₂ emissions, mainly in group 2. Urbanization contributed to the hike of CO₂ emissions in both country groups but much more intensely for group 1. Evidence of a tendency for decreasing CO2 emissions was also found, reflecting the efficiency gains over time.

Keywords: Carbon dioxide emissions; Environmental Kuznets curve; Heterogeneous panels; Panel quantile regression; Panel smooth transition regression; Shadow economy.