Asymmetric effect of financial globalization on carbon emissions in G7 countries: Fresh insight from quantile-on-quantile regression

Abstract

Being among the highest emitters of greenhouse gases globally, the G7 countries have pledged to halve their carbon emissions by 2030, relative to 2010. This is in clear recognition of the need to transit from carbon energy to more sustainable solutions that are climate-friendly. In view of this, understanding how financial globalization contributes to the realization of those pledges becomes necessary. In this paper, we introduce two major innovations to the literature on financial globalization and environmental degradation. First, in terms of methodology, we apply the quantile-on-quantile regression (QQR) approach with a nonparametric technique over the period 1970Q1–2018Q4. The combination of these techniques has so far received limited attention in the literature. Second, we test for an asymmetric nexus between financial globalization and carbon emission in the G7 economies—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—as they present an interesting area of research focus. Empirical results from the QQ regression show an emission-increasing effect of financial globalization on environmental degradation in the G7 nations. Furthermore, in order to assess the causal effect of financial globalization on environmental degradation, we apply the nonparametric causality technique. Overall, results from the nonparametric estimations show that financial globalization significantly predicts variation in environmental degradation across quantiles. From a policy standpoint, economic and political frameworks in these nations should be directed towards enhancing higher financial inflows that are in line with the stated economic and environmental policies, among other policy suggestions.