Income Inequality and CO2 Emissions in Developing Countries: The Moderating Role of Financial Instability

Abstract

This paper studies the effects of income inequality and financial instability on CO2 emissions in the presence of fossil fuel energy, economic development, industrialization, and trade openness. Moreover, the present study is the first to examine the moderating role of financial instability between income inequality and CO2 emissions. We utilized panel data of forty-seven developing countries for the period 1980–2016 by utilizing the stochastic impacts by regression on population, affluence, and technology (STIRPAT) model. The empirical outcomes in all models indicate that income inequality and industrialization significantly reduce environmental degradation, while fossil fuel, trade openness, and economic growth decrease the quality of the environment. However, financial instability (without interaction term) shows no significant link to environmental quality, whereas (with interaction term) it shows a significant negative effect on CO2 emissions. In addition, the result of the interaction variable reveals that an increase in inequality, ceteris paribus, in combination with the rise in financial instability, is expected to increase pollution. Furthermore, there exists a bidirectional causal association among income inequality, financial instability, fossil fuel, trade openness, industrialization, economic growth, and the interaction variable with CO2 emissions.