Balancing growth and sustainability: the role of institutional quality on economic growth and carbon emissions in BRICS countries

This study examines the intricate relationship between economic growth, carbon emissions, and institutional quality across the extended BRICS countries, comprising Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates, from 2000 to 2023. To address endogeneity and omitted variable bias, the model incorporates Foreign Direct Investment (FDI) alongside institutional quality and emissions. Using panel unit root and cointegration tests, we confirm that the variables are non-stationary at levels but stationary after first differencing, and share a long-run equilibrium relationship. Long-run estimates are obtained through Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) to quantify the long-run impacts of explanatory variables on economic growth. The key results support the notion that institutional quality is a key determinant of the growth-environment relationship. Our results also confirm that carbon emissions have an adverse “significant” effect on economic growth. However, their adverse impact diminishes in more institutionalized countries. Moreover, the significant and positive interaction impact between institutional quality and CO2 emissions suggests that effective institutions can decouple growth from environmental degradation, reinforcing the hypothesis of moderated environmental management dynamics of the environmental Kuznets curve (EKC). In addition, the quality of institutions has a positive and independent impact on GDP growth, highlighting the need for a strong institutional foundation to perform well in the economy. FDI is found to boost growth, while its environmental impact depends on governance quality. Panel Granger causality tests also confirmed bidirectional causality between GDP and CO2 emissions, as well as unidirectional causality from CO2 emissions to institutional quality. These findings underscore the importance of institutional reforms for achieving inclusive growth and climate goals, aligning closely with the SDGs.