Informality, governance, and digitalization: evidence on CO2 emissions from BRICS + economies

Abstract The BRICS + coalition, representing a powerhouse of emerging economies, faces a dual challenge: sustaining economic growth while mitigating severe environmental degradation, notably air pollution. This study argues that a complete analysis must account for the informal economy—a substantial, yet often unregulated, segment of economic activity in these countries. We investigate its impact on air pollution (measured by CO 2 emissions) and examine whether governance institutions, captured by control of corruption and government effectiveness, alongside the transformative force of digitalization, can mitigate this effect. Employing a System GMM estimator on a panel of 10 BRICS + nations from 1996 to 2023, our analysis controls for endogeneity and unobserved heterogeneity. The results demonstrate that the informal economy is a significant source of air pollution (CO 2 ). However, strong governance institutions and digitalization act as powerful antidotes. We find that digitalization significantly reduces air pollution, primarily by fostering the formalization of economic activities, enhancing regulatory oversight through transparency, and promoting the adoption of cleaner, more efficient technologies. Furthermore, the analysis reveals a synergistic relationship: Robust governance not only directly curbs emissions but also amplifies the positive environmental effects of digitalization, while simultaneously weakening the polluting effect of informality. We conclude that for BRICS + leaders, a dual-pronged strategy is vital: Prioritizing deep-seated legal and institutional reforms to improve governance, while aggressively investing in digital infrastructure and literacy, is essential for reconciling economic development with pressing environmental goals.