Exploring the moderating role of financial development in environmental Kuznets curve for South Africa: fresh evidence from the novel dynamic ARDL simulations approach

Abstract

Abstract The extant literature has produced mixed evidence on the relationship between financial development and ecological sustainability. This work addresses this conundrum by investigating financial development’s direct and indirect consequences on ecological quality utilizing the environmental Kuznets curve (EKC) methodological approach. Our empirical analysis is based on the novel dynamic autoregressive distributed lag simulations approach for South Africa between 1960 and 2020. The results, which used five distinct financial development measures, demonstrate that financial development boosts ecological integrity and environmental sustainability over the long and short terms. In the instance of South Africa, we additionally confirm the validity of the EKC theory. More importantly, the outcomes of the indirect channels demonstrate that financial development increases energy usage’s role in causing pollution while attenuating the detrimental impacts of economic growth, trade openness, and foreign direct investment on ecological quality. Moreover, the presence of an inadequate financial system is a requirement for the basis of the pollution haven hypothesis (PHH), which we examine using trade openness and foreign direct investment variables. PHH for both of these variables disappears when financial development crosses specified thresholds. Finally, industrial value addition destroys ecological quality while technological innovation enhances it. This research provides some crucial policy recommendations and fresh perspectives for South Africa as it develops national initiatives to support ecological sustainability and reach its net zero emissions goal.

Keywords

• Financial development
• Trade openness
• CO2 emissions
• Dynamic ARDL simulations
• Energy consumption
• EKC