Analyzing financial and economic development thresholds for carbon emission reduction: a dynamic panel regime-switching study across income levels

Purpose: This research investigates the threshold effects of the interplay between finance, development and carbon emissions across 97 countries, including 50 low-income and 47 high-income countries, during the period from 1991 to 2019. Design/methodology/approach: Employing various econometric modeling techniques such as dynamic linear regression, dynamic panel threshold regression and in/out of sample splitting, this study analyzes the data obtained from the World Bank's world development indicators. Findings: The results indicate that low-income countries require a minimum financial development threshold of 0.354 to effectively reduce carbon emissions. Conversely, high-income countries require a higher financial development threshold of 0.662 to mitigate finance-induced carbon emissions. These findings validate the presence of a finance-led Environmental Kuznet Curve (EKC). Furthermore, the study highlights those high-income countries exhibit greater environmental concern compared to their low-income counterparts. Additionally, a minimum GDP per capita of US$ 10,067 is necessary to facilitate economic development and subsequently reduce carbon emissions. Once GDP per capita surpasses this threshold, a rise in economic development by a certain percentage could lead to a 0.96% reduction in carbon emissions across all income levels. Originality/value: This study provides a novel contribution by estimating practical financial and economic thresholds essential for reducing carbon emissions within countries at varying levels of development.