Conditional effect of governance quality on the finance-environment nexus in a multivariate EKC framework: evidence from the method of moments-quantile regression with fixed-effects models

This paper investigates the mitigating effect of governance quality on the finance-environment nexus in a multivariate EKC framework in 123 selected countries during the 1990–2017 period. We mainly employ the method of moments-quantile regression (MM-QR) with the fixed-effects model, among others. First, the MM-QR estimator reveals that financial development reduces environmental quality more significantly in countries with initially higher levels (the 75^th and 90^th quantiles) of CO₂ emissions than in other countries (the 25^th and 10^th quantiles). Second, the attenuating effect of governance quality on the finance-environment nexus is more remarkable in nations with low initial levels (the 25^th and 10^th quantiles) of CO₂ emissions. Third, we find that the marginal positive effect of financial development on CO₂ emissions is smaller under a good regulatory framework than under corruption control and the rule of law, especially in the top emitters (the 75^th and 90^th quantiles). Fourth, unlike oil, which has a considerable negative impact on the environmental quality of the major emitters, renewable energy usage reduces CO₂ emissions in countries in all quantiles, primarily in the lowest quantiles. Fifth, the findings also show that urbanization dramatically worsens environmental quality in all economies, particularly those in the lowest quantiles. Finally, we confirm that the EKC hypothesis holds in all countries across different quantiles. The study’s final section discusses policy implications for sustainable development in all countries.