The Ambivalent Role of Institutions in the CO2 Emissions: The Case of Emerging Countries

The CO2 emission is a very urgent theme for emerging economies that are currently producing 60% of the global emissions. Because these countries generally have a high economic growth, they usually face with environmental issues. This article investigates the relationship between the economic activity, and more precisely economic integration (trade openness and FDI inflow), on CO2 emissions by taking into consideration the potential role played by institutions. Through sys-GMM estimators, our analysis investigates a sample of 36 emerging economies on a period going from 2002 to 2015. Our major findings are the following: (1) The economic integration increases CO2 emissions, supporting the pollution-haven hypothesis for emerging economies; (2) the improvement of institutional quality also increases CO2 emissions via the increase of economic activities it generates; (3) more interestingly, the improvements of institutions can reduce the positive effect of FDI inflow and trade openness on CO2 emissions. We will explain this observation through the lens of the well-known Environmental Kuznets curve suggesting that an improvement of institutional quality goes hand in hand with financial and trade openness of emerging economies if these countries want to fight against global warming in the long term.