Effect of domestic material production on environmental sustainability in EU countries under changing financial development: a dynamic panel threshold regression approach

Although the European Union (EU) has made significant progress towards achieving the Sustainable Development Goals (SDGs), the goal of sustainable consumption and production (SDG 12) is reported to be far from being achieved in the region. This study examines the effect of domestic material production on environmental sustainability (measured by greenhouse gas emissions) at different levels of financial development in 19 EU countries over the period 2000-2017. Using a dynamic panel threshold regression approach, the results provide evidence that domestic material production increases greenhouse gas emissions only when financial development is below a threshold of 0.8743%. The effect of domestic material production on greenhouse gas emissions is negative and insignificant when financial development exceeds the estimated threshold. The results further show that domestic material consumption, financial development and investment in research and development all hinder environmental sustainability by intensifying greenhouse gas emissions. Moreover, the results indicate that income per capita and renewable energy improve environmental sustainability by dampening greenhouse gas emissions. The robustness of these results is tested using fixed-effects ordinary least squares and random-effects generalised least squares with Driscoll-Kraay standard errors. Therefore, this study offers policy implications for achieving a sustainable environment.