FINANCIAL GLOBALIZATION, ENVIRONMENTAL POLICY STRINGENCY AND CARBON PRESSURE IN G20 ECONOMIES: EVIDENCE FROM CS-ARDL APPROACH

Abstract

The role of G20 countries in the sustainability of the environment is critical as they contribute to the world's economic output and the emission of greenhouse gases. This paper uses the Carbon Dioxide Pressure Index as a degradation indicator to analyze how financial globalization, economic growth, environmental diplomacy, and environmental policy stringency affect environmental pressure in G20 economies. It employs second-generation econometric approaches employing balanced panel data of 17 G20 countries between the years 1995 and 2024 to overcome cross-sectional dependence and slope heterogeneity. CIPS and CADF tests are used to evaluate the stationarity, whereas Pedroni and Westerlund cointegration tests prove the long-term relationships. The estimates of the long- and short-run dynamics are done using the Cross-Sectionally Augmented ARDL (CS-ARDL) model, which includes the interaction term to represent the moderating effect of environment policy stringency. Dumitrescu-Hurlin panel causality test is used to test causal relationships. The results show cross-sectional dependence, heterogeneity, and cointegration of the variables in the long-run. Financial globalization, economic growth, environmental diplomacy, and the stringency of the environmental policy raise CO₂PI in the long-run, which suggests that there is an increase in the carbon pressure. The relationship between financial globalization and policy stringency is negative and significant; stringent environmental policies reduce the negative environmental impacts of financial globalization. Financial globalization and policy stringency affect carbon pressure downward in the short run. The error-correction term (-0.31) is a measure that shows how a long-run equilibrium is established; the figure shows that about 31 per cent of the short-run disequilibrium is adjusted, which shows that there is a steady long-run equilibrium. The findings highlight that the policymakers in the G20 should coordinate financial globalization with strong, enforceable environmental policies and collaboration among the countries to bring about sustainable environmental policies.