Does financial stability and renewable energy promote sustainable environment in G-7 Countries? The role of income and international trade

Abstract

Financial stability is of great importance especially in the context of achieving sustainable environment. The objective of this study is to fill the research gap in this area by introducing financial stability, international trade, renewable energy, and income as novel determinants of consumption-based carbon emissions. The present study is based on G-7 economies, and the time period is from 1990 to 2018. The present study employed advanced econometric techniques that can deal with problems of slope homogeneity and cross-section dependence. The cointegration analysis results show a stable long-run association between financial stability, renewable energy, international trade, national income, and consumption-based carbon emissions with structural breaks (1994 Italy’s fiscal crises, 2001 mild recession, 2008 global financial crises, and 2010 European debt crises). The results show that both in long- and short-run financial stability, exports and renewable energy significantly reduce carbon emissions. In contrast, national income and imports are found to have a significant positive effect on consumption-based carbon emissions. Policymakers in G-7 countries should focus more on financial sector stability and encourage firms to use renewable energy. Any policy that targets financial stability, exports, and renewable energy will significantly reduce carbon emissions. This study is a novel contribution to the area of consumption-based carbon emissions as it incorporates the role of financial stability for G-7 economies.