Assessing the impact of digital economy and financial development on environmental quality worldwide

This study investigates how digitalization and financial development influence environmental quality across 110 countries categorized into low-, middle-, and high-income groups over the period 1996–2022. Motivated by global commitments to climate action and the rising digital and financial transformations of economies, the study explores whether these forces act as catalysts or challenges to sustainable environmental progress. Using the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) methodology, we address cross-sectional dependence and slope heterogeneity to ensure robust estimations. Our findings reveal heterogeneous impacts: in low-income countries, digitalization combined with improved financial access can support clean energy adoption, while in high-income countries, advanced financial systems may either promote green investments or drive environmental degradation when poorly regulated. Across all groups, renewable energy consumption positively contributes to emissions reduction, whereas urbanization and trade openness tend to increase emissions. Policy implications emphasize the need for context-sensitive strategies: expanding digital finance and financial inclusion in low-income countries; strengthening environmental regulations to guide capital allocation in middle- and high-income countries; and aligning financial innovation with climate goals through green bonds, ESG investing, and digital tools for transparent green finance. This study provides new empirical insights for policymakers seeking integrated digital-financial pathways toward environmental sustainability.