Go‐for‐green policies: The role of finance and trade for sustainable development

The relationship between carbon dioxide (CO2) emissions and income per capita (GDPpc) is widely discussed in the environmental literature, generally known as ‘Environmental Kuznets Curve (EKC)’. The study primarily contributes to the literature on the EKC by (a) focusing on a sample of less developed countries (LDCs), (b) controlling for per capita GDP scaled by a factor of two (in logs), (c) controlling for lagged per capita GDP squared (in logs), and (d) controlling for per capita GDP cubed (in logs). The effect of environmental regulation on trade and FDI inflows evaluates the ‘Pollution Haven Hypothesis (PHH)’ across nations. The extended version of the EKC (EV‐EKC) framework validates the population‐based emission, generally known as ‘IPAT hypothesis’ where (I) is measured by air pollution (i.e. CO2 emissions), (P) is measured by population growth, (A) is measured by GDPpc, and (T) is measured by FDI inflows, trade, and energy demand. The study selected a panel of 24 LICs for the period of 2002–2016 for robust inferences. The results supported the inverted U‐shaped EKC hypothesis under the new beta's transformation in panel econometric techniques. The results partially supported the ‘PHH’ where FDI inflows are significantly associated with the CO2 emissions; while trade openness is not statistically significant in the prescribed regression apparatus. Population growth decreases carbon emissions to support the ‘genius’ principle, which rejected the IPAT hypothesis, whereas energy demand increases carbon emissions across countries.