Financial Instability and Consumption-based Carbon Emission in E-7 Countries: The Role of Trade and Economic Growth

Abstract

The present study examines the effects of financial instability on consumption-based carbon emission in the presence of international trade, technological innovation, and economic growth in Emerging Seven (E-7) countries from 1995-2018. This study employed second and third-generation panel cointegration methodologies. The result of the cross-sectional dependency and slope heterogeneity test confirms that the panels are correlated, and there exists slope heterogeneity. The results for the short- and long-run confirm the relationship between consumption-based carbon emission, financial instability, imports, exports, technological innovation, and economic growth. In both the short- and long-run, imports and economic growth enhances carbon emission, whereas financial instability, technological innovation, and exports significantly reduce consumption-based carbon emission. The robustness check findings obtained using the Augmented Mean Group (AMG) and Common correlated effect mean group (CCEMG) further validate the results. Policymakers should make financial reforms that actively encourage and give incentives to firms that adopt efficient and environmentally friendly technologies, reducing energy consumption, and carbon emission.