Income Disparity, Institutional Effectiveness, and Environmental Decline in Post-Soviet Economies: Insights from VEC and VAR Causality Methods

This research investigates how income distribution, and the quality of institutions influence environmental damage in post-Soviet economies from 1996 to 2020, employing advanced panel estimation techniques. To test Granger causality, we utilize two alternative methodological procedures: The VECM and the augmented level VAR model with integrated and co-integrated procedures of arbitrary orders suggested by Toda & Yamamoto (1995). Our primary finding suggests that although the VECM results do not uncover a causal relationship running from income distribution and institutional quality to CO2 emission, the Toda-Yamamoto approach indicates causality from the Gini index and the majority of the evaluated institutional quality indicators—such as control of corruption, government effectiveness, regulatory quality, and rule of law—to carbon dioxide emissions. Strong institutions bolster the enforcement of environmental policies, encourage sustainability, and mitigate emissions by ensuring compliance with regulations and responsible resource utilization. Addressing income inequality in observed countries is vital as it leads to consumption disparities and limited access to clean technologies, resulting in heightened carbon emissions and environmental degradation, especially pertinent in post-Soviet economies where adopting equitable economic policies alongside robust environmental regulations and governance is imperative.