The impact of financial development and globalization on environmental quality: evidence from South Asian economies

Climate change resulting from the higher concentration of greenhouse gases in the atmosphere is a threat to the sustainability of life on earth. To ensure sustainable development, the study analyzed the impact of financial development, globalization, and energy use on the environmental quality of South Asian economies over the period 1990–2014. To account for cross-sectional dependence, Breusch-Pagan-Lagrange multiplier, Pesaran-scaled Lagrange multiplier, bias-corrected-scaled Lagrange multiplier, and Pesaran cross-sectional dependence tests are used. The second-generation tests are used to determine the stationarity level of the variables. Furthermore, the Westerlund panel cointegration test confirms cointegration among the variables. For long-run association, fully modified ordinary least squares, dynamic ordinary least squares, and pooled mean group estimators are used. The results suggest that financial development contributes to carbon emissions, whereas globalization has the potential to control emissions. The study also used Dumitrescu and Hurlin’s (2012) panel causality test to explore the causal relationship among the variables. Unidirectional causality is observed from economic growth, globalization, and financial development to environmental degradation and from emissions to energy use, respectively. As financial development deteriorates environmental quality, therefore, the government should monitor the disbursement of loans for research and development, green financing, and efficient production that reduce resource consumption and improves environmental quality. Financial development should not compromise environmental quality and endanger sustainability. Furthermore, South Asian countries should promote globalization to support the inflow of green technologies to enhance environmental quality.