Conditional Effect of Governance Quality on the Finance-Environment Nexus in a Multivariate Ekc Framework : Evidence from the Method of Moments-Quantile Regression with Fixed-Effects Models

This paper investigates the dynamics between financial development, governance quality, renewable energy consumption, urbanization, oil prices, and environmental quality in 123 selected countries during the period 1990-2017. In particular, we examine the conditional effect of governance quality on the finance-environment nexus in a multivariate model within the EKC framework using mainly the Method of Moments-Quantile Regression with Fixed-Effects (MM-QR) model, among others. First, the MM-QR estimator reveals that financial development significantly reduces environmental quality in countries with initially high levels (the 75th and 90th quantiles) of CO2 emissions than in others (the 25th and 10th quantiles). Second, the attenuating effect of governance quality on the finance-environment nexus is greater in nations with low initial levels (the 25th and 10th quantiles) of CO2 emissions. Third, we find that the marginal positive effect of financial development on CO2 emissions is smaller under a good regulatory framework than under corruption control and the rules of law, especially in the top emitters (the 75th and 90th quantiles). Fourth, unlike oil, which has a considerable negative impact on the environmental quality in the major emitters, renewable energy usage reduces CO2 emissions in all quantiles, primarily in the lowest. Fifth, the findings also show that urbanization dramatically worsens environmental quality in all the economies, particularly in the lowest quantiles. Finally, we confirm that the EKC hypothesis holds in all countries across different quantiles. Accordingly, the study’s final section discusses policy implications for sustainable development in all countries