The Trilemma of GDP, FDI, And Carbon Emissions: An Empirical Investigation of the Environmental Kuznets Curve (EKC) And Pollution Haven Hypothesis (PHH) Across A Global Multi-Tier Economic Spectrum

In this study, the authors examine the validity of the Environmental Kuznets Curve (EKC) hypothesis and the Pollution Haven Hypothesis (PHH) across a stratified sample of ten countries across three different development levels (developed countries, developing countries, least-developed countries) from 1990–2023. This paper utilizes a two-stage panel econometric approach of Autoregressive Distributed Lag (ARDL) cointegration analysis with bounds testing (Pesaran, Shin, and Smith, 2001) and System Generalised Method of Moments (SGMM) (Blundell and Bond, 1998), as well as using the bootstrap ARDL inference (McNown, Sam, and Goh, 2018) and Bai–Perron structural break analysis techniques to analyse the dynamic relation between gross domestic product per capita and foreign direct investment (FDI), energy consumption, trade openness, and carbon dioxide (CO2) emissions in the panel. Penetration of renewables and institutional quality are explicitly modelled as moderating effects via interaction specification. There are four major findings. First, the EKC hypothesis is confirmed statistically for all sub-samples, with the turning points of each sub-sample varying between USD 12,300 per capita (developing) and USD 14,200 per capita (developed), which means that most of the developing countries are still on the upward part of the emissions curve. Second, the PHH is supported especially in the least developed countries where a 1 per cent rise in FDI inflows corresponds to a 0.342 per cent rise in CO₂ emissions, whereas this is statistically non-significant in the developed economies. Third, the threshold for changing FDI from a pollution haven to a pollution halo is a penetration of renewables in total energy consumption above 20 per cent, which significantly reduces the effects of FDI on emissions. Fourth, a structural break at 2015, when the Paris Agreement was adopted, suggests that the growth–emissions and FDI–emissions couplings weakened considerably after the adoption of the Paris Agreement. The findings have substantive implications for the design and implementation of selective FDI frameworks, institutional strengthening, and the development of nations striving for a positive economic-environmental development.