The environmental damage: a disaggregated effect of financial structure, freedom dynamics and institutional sub-systems on CO2 emissions

Purpose This study examines the impact of various macroeconomic, financial and institutional factors, including foreign direct investment (FDI), financial development (FD), freedom dimensions and institutional sub-systems on CO2 emissions across 30 countries over 23 years (2002-2023). The research aims to uncover both the short-term and long-term effects of these variables on environmental sustainability. Design/methodology/approach A Pooled Mean Group - Autoregressive Distributed Lag (PMG-ARDL) model is employed to analyze panel data from 30 countries over the period 2002-2023. The model was selected using the Akaike Information Criterion (AIC) to account for both long-term and short-term dynamics in the relationship between the studied variables and CO2 emissions. Findings The results reveal that in the long term, most variables, including FDI, financial development and economic freedom, have significant impacts on CO2 emissions, with varying directions. In contrast, short-term effects are largely insignificant, indicating that the environmental impacts of economic and institutional factors are more pronounced over extended periods. Research limitations/implications The findings suggest that policymakers need to consider the long-term environmental consequences of economic and financial policies. For instance, while financial development and economic freedom may drive growth, they also contribute to higher CO2 emissions, necessitating a comprehensive and inclusive approach to sustainable development. Originality/value This study provides a comprehensive analysis of the interplay between financial, institutional and freedom dynamics and their impact on CO2 emissions, offering valuable insights for policymakers focused on achieving sustainable economic development. Using the PMG-ARDL model adds robustness to the findings by capturing both short-term and long-term effects.