Does oil, gas, and mineral rents reduce amid rising environmental policy stringency? Mediating role of financial development in G11 countries

Improving a nation's efficient utilization of mineral resources depends heavily on the implementation of effective environmental regulations and incentives. Though stringent policies may have the potential to decrease revenues from activities such as mining or logging, they interact intricately with the income generated from these resources. This interaction is notably influenced by the nation's level of financial development (FD).The impact of FD on the interplay between environmental regulations and natural resource rents demands careful examination. It provides businesses with the financial means and tools necessary for adopting sustainable practices and enhancing their profitability. To delve into this relationship, we investigated the role of financial growth in mediating the connection between the Environmental Policy Stringency Index (EPSI) and three types of natural resource rents (NRRs) in G11 countries from 1995 to 2022. Utilizing FD as a mediator, we employed a structural equation model to estimate EPSI's direct, indirect, and overall impact on NRR. Our study revealed a direct link between EPSI and a decrease in NRRs. However, FD significantly mitigates this relationship, lessening the negative impact of EPSI on NRRs. It suggests that NRRs directly decline with tightened environmental regulations. Yet, a well-developed financial sector acts as a protective buffer, diminishing the detrimental effects of environmental policies on NRRs. This underscores the critical role of FD in sustaining responsible resource management, emphasizing the need for legislators to consider financial institutions' support for environmental objectives.