Environmental Kuznets Curve and Roles of Development Finance in the Global South

Abstract

Abstract This study investigates the nexus between CO2 emissions, economic development and development finance using a novel dataset for 76 developing countries from 1995 to 2018. Employing a framework of three dimensions, the natural endowment, the real economy and the financial sector, our estimation method takes into account the bi-directional causality of the environmental delegation and economic growth by adopting the simultaneous equations model estimated via fixed effect 2SLS. In the tradition of the environment Kuznets curves (EKC), we found an inverted N-shaped EKC relationship in the panel data which is statistically significant and robust. On development finance, net transfers from bilateral and multilateral banks are not directly associated with environmental degradation. The green natural capital is negatively and statistically significantly associated with the CO2 emissions density, providing some evidence for the existence of the “biological carbon sequestration” effect. Our results provide insights to enhance the effectiveness of future development finance, e.g. to renewable energy, investment in human capital and green natural capital.