The Role of Economic and Financial Development in Shaping Environmental Quality: A Comparative Study of Developed and Developing Countries

This study investigates the relationship between environmental quality, economic growth, financial development, renewable energy, and trade openness in both developing and developed countries from 1990 to 2022. The analysis uses the Pedroni (1999, 2004) and Kao (1999) cointegration tests, followed by panel Fully Modified Ordinary Least Squares (FMOLS) estimations. The results indicate that environmental quality, GDP growth, energy consumption, renewable energy, financial development, and trade openness are interconnected in the long term. According to the panel FMOLS results, renewable energy consumption and trade openness help reduce carbon emissions in both groups of countries, with a stronger effect observed in developing economies. Additionally, the Dumitrescu–Hurlin (2012) panel causality test reveals unidirectional causality from GDP growth, financial development, renewable energy, and energy use—though not from trade openness—to carbon emissions, supporting the growth hypothesis in the short term. Overall, the results highlight the important role of renewable energy and financial development in forming carbon emissions reduction strategies. The study provides valuable policy insights, especially for developing countries aiming to improve environmental sustainability.