Examining short-run and long-run nexus between economic growth, financial development, energy consumption and environmental degradation: empirical evidence for the Environmental Kuznets Curve Hypothesis in Egypt

The growing environmental challenges faced by Egypt highlight a need to examine how key macroeconomic factors influence environmental sustainability. In response, this research analyzes the short-run and long-run effects of economic growth, financial development, and energy consumption on environmental degradation in Egypt. Using annual time-series data from 1960 to 2022, we employ the Autoregressive Distributed Lag (ARDL) methodology and Error Correction Model (ECM) to assess the short-run and long-run effects of these macroeconomic factors on environmental degradation. Additionally, Granger causality tests are applied to explore causal linkages among the variables, while the Cholesky variance decomposition method estimates the proportionate impact of shocks on CO2 emissions. The results revealed that, in the short-run, energy consumption, financial development, urbanization, and economic growth negatively impacted environmental quality, whereas trade openness and the squared term of economic growth improved it. In the long-run, however, all variables—except for the squared term of economic growth—contributed to increased CO2 emissions. Furthermore, the study identified significant bidirectional causality between economic growth and energy consumption. Variance decomposition estimates indicate that economic growth and trade openness are primary drivers of CO2 emissions in Egypt, accounting for 28.45% and 20.11% of the observed variation, respectively. These findings suggest that Egypt’s economic growth and international trade are pollution-intensive, highlighting the need for targeted policy interventions. We recommend the promotion of a clean energy transition through environmental awareness campaigns, investments in renewable energy technologies, financial sector reforms, and the development of sustainable urban infrastructure to support low-carbon economic growth and enhance environmental sustainability.