Addressing global environmental degradation: examining the role of financialization and trade globalization on reducing carbon emissions

The pressing challenge of achieving environmental sustainability hinges on financialization and trade globalization. These dynamics are central to strategies aimed at mitigating ecological degradation. Effective financial and policy decisions are crucial in managing the interplay between finance, trade, and environmental outcomes. This study investigates the relationship between financialization and ecological degradation by employing three dimensions of financialization financial development, financial markets, and financial institutions within the framework of the Environmental Kuznets Curve (EKC). Using a two-step system generalized method of moments (GMM) on a balanced panel of 129 developed and developing countries covering the period 2000 to 2022, the analysis provides robust evidence on the heterogeneous roles of financialization. The findings reveal that trade and financial development are associated with higher emissions in both developed and emerging economies, while financial markets significantly reduce emissions. Financial institutions also demonstrate a negative association with emissions, underscoring their role in supporting sustainable investment. The squared term of trade openness indicates significant emission reductions, consistent with the EKC’s inverted U-shaped hypothesis. However, the interaction effects of financialization and trade on emissions are essentially insignificant, suggesting weak synergies between these forces. Overall, the study highlights that financial development and trade can initially exacerbate ecological pressures. Still, financial markets and institutions, when supported by regulatory and governance frameworks, play a critical role in advancing sustainability. These results offer theoretical contributions to the finance–environment nexus and provide policy insights for aligning financial systems and trade with the Sustainable Development Goals.