De Facto vs. De Jure Globalization, Financial Development, and Low-Carbon Transition: Heterogeneous Panel Evidence Across Continental Regions

This paper examines the environmental effects of de facto and de jure trade and financial globalization in 161 countries over the 1996–2020 period. Unlike studies that rely on aggregate globalization measures, it distinguishes between actual cross-border flows and formal policy openness. The analysis uses CCEMG and AMG estimators to account for cross-sectional dependence and heterogeneous country responses. It also applies a panel smooth transition regression model to assess whether the effect of trade globalization changes with government effectiveness. The baseline results show that de facto trade globalization is positively associated with per capita CO2 emissions. The result is weakly significant in the CCEMG estimates and stronger in the AMG estimates. De facto financial globalization does not show a statistically robust long-run relationship with emissions. De jure trade and financial globalization are generally insignificant once realized flows are included in the model, although their estimated effects vary across alternative estimators. The nonlinear results point to a different pattern. In countries with weak government effectiveness, greater trade globalization is associated with higher emissions. This relationship weakens as institutional capacity improves and becomes negative at higher levels of government effectiveness. A similar transition appears in the renewable-energy model, where trade globalization is more favorable in stronger institutional settings. The results suggest that formal openness alone is unlikely to improve environmental outcomes. The environmental consequences of globalization depend more on how economic integration takes place and on whether public institutions can enforce environmental rules. However, the magnitude and significance of financial and de jure components display sensitivity to estimator choice, highlighting the importance of accounting for slope heterogeneity.