Picturing the future of carbon-dioxide emissions: the role of informal economy

The literature on the informal economy and environmental quality nexus is quite thin despite that the considerable size of the informal economy is capable of creating significant effects on the environmental quality, since the firms in the informal part of an economy are not subject to regulations. This study aims to investigate the aforementioned nexus on the global scale using a large panel of 138 countries for the 1990-2018 period. By utilizing Augmented mean-group estimation technique and bootstrap Granger non-causality approach, it is shown that the size of the informal economy is negatively associated with and causally linked to carbon-dioxide (CO2) emissions, globally. In addition, GDP per-capita, population and government consumption are found to be in highly significant positive relation with the emissions, whereas no significant effect is captured from globalization and capital stock. The marginal analysis for the informal sector size and CO2 emissions nexus shows that the relation gains momentum as the informal sector shrinks, particularly below 20% of GDP. Thereby, it is concluded that the countries with an informal sector that allocates a larger part of the economy are suffering from severe underproductivity. It is also argued, based on the marginal analysis, that if the size of the informal economy continues to shrink globally and policymakers do not take the necessary actions, CO2 emissions might hike sharply in the future.