Unraveling nonlinear dynamics between urbanization, growth, and emissions in emerging and developing economies

This study investigates the nonlinear and causal effects of urbanization and economic growth on CO2 and N2O emissions across 50 emerging and developing economies from 1998 to 2019. Using a semi-parametric approach, panel threshold models, and an IV-2SLS estimator, we capture complex dynamics and address endogeneity in urbanization by leveraging institutional quality as an instrument. Our key novelty lies in uncovering an M-shaped relationship between urbanization and CO2 emissions—peaking at 95% urbanization before declining to 86% at higher levels—while N2O emissions exhibit a persistent linear increase. Causally, economic growth (treatment) increases emissions (outcome), but urbanization moderates this effect, reducing CO2 emissions beyond a threshold of 69.9% urbanization. However, no such mitigating effect is found for N2O. These results call for pollutant-specific policies, promoting cleaner technologies to reduce CO2 while targeting agriculture, waste, and transport to curb N2O.