The Role of Institutions on the Global Economy-Emissions Nexus

In 2015, the COP21 countries made pledges to reduce CO2 emissions, focusing on decreasing emissions in the energy sector. A challenge most of these countries experience is reducing CO2 emissions while sustaining economic growth; a possible solution to this challenge might be to account for the effect of institutional quality. This study examines potential pairwise relationships between economic growth and CO2 emissions while considering the institutional quality. The study uses a panel dataset of 106 countries from 2003 to 2018, divided into four income groups. The findings at a disaggregated level confirm no causal relationship is found for low-income countries; however, causal relationships start to form as results are shown for middle-income to high-income countries. At an aggregate level, the results indicate economic growth granger causes CO2 emissions, while granger causation was also found between economic growth and institutional quality.