The Non-Linear Impact of Financial Development on Environmental Quality and Sustainability: Evidence from G7 Countries

Int J Environ Res Public Health. 2022 Jul 8;19(14):8382. doi: 10.3390/ijerph19148382.

Abstract

This paper analyses the impact of financial development on the environmental quality and sustainability for the group of G7 countries over the period 1990-2019 based on static panel data-fixed effect models. The objective is to explore if there exists a non-linear relationship between the whole financial system development and a wide array of measures of environmental sustainability and degradation, namely adjusted net savings, greenhouse gas, CO2, methane, nitrous oxide emissions and ecological footprint. We define a new Financial Environmental Kuznets Curve (FEKC) by introducing the square term of financial development on the environment-finance relationship. Empirical results prove the existence of non-linear relationships between the composite index of financial development and environmental degradation for the group of advanced economies. In the case of methane, we validate the presence of an inverted-U shape association in line with the FEKC hypothesis, while for greenhouse gas and CO2 the link follows a U-shaped pattern. The impact of financial development on environmental sustainability is monotonically positive and statistically significant while the ecological footprint is not statistically linked with the level of financial development within G7 countries. Economic growth, human capital, population density and primary energy consumption appear as significant drivers of environmental quality and sustainability.

Keywords: CO2; Environmental Kuznets Curve; ecological footprint; environmental sustainability; financial development; greenhouse gases; methane; nitrous oxide.

MeSH terms

  • Carbon Dioxide / analysis
  • Economic Development
  • Greenhouse Gases* / analysis
  • Humans
  • Income
  • Methane / analysis

Substances

  • Greenhouse Gases
  • Carbon Dioxide
  • Methane

Grants and funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.