sustainability

Article
The Nexus between Financial Regulation and Green
Sustainable Economy
Elena Cigu 1 , Mihai-Bogdan Petris, or 1 , Alina-Cristina Nut, ă 2 , Florian-Marcel Nut, ă 2 and
Ionel Bostan 3, *
1 Faculty of Economics and Business Administration, Alexandru Ioan Cuza University, 11 Carol I Blvd.,
700506 Iasi, Romania; elena.chelaru@uaic.ro (E.C.); mihai.petrisor@uaic.ro (M.-B.P.)
2 Economic Sciences Faculty, Danubius University, 3 Galati Blvd., 800654 Galat, i, Romania;
alinanuta@univ-danubius.ro (A.-C.N.); floriann@univ-danubius.ro (F.-M.N.)
3 Faculty of Law and Administrative Sciences, Stefan cel Mare University, 13 Universitatii,
720229 Suceava, Romania
* Correspondence: ionel_bostan@yahoo.com or ionel.bostan@fdsa.usv.ro; Tel.: +40-230-216-147




Received: 23 September 2020; Accepted: 13 October 2020; Published: 22 October 2020


Abstract: Following the international financial trend, several countries launched comprehensive and
coordinated financial system reform programs to reach green sustainable economy. These reforms
have included significant adjustments in financial regulation and supervision policies designed
precisely to stimulate the improvement in the performance of green economy. This paper explores
the literature regarding the importance of financial regulation and the state of green sustainable
economy as a first objective. The second objective is to develop a linear regression model for
empirically understanding how the financial regulation can affect green sustainable economy and
apply it for 25 European Union countries, over the period of time 2000–2018, covering pre-crisis, crisis,
and post-crisis period. Our findings support the idea that coherent financial regulation framework
determines green economy to be growth-friendly and sustainable. The paper can be considered a
useful viewpoint in understanding the complex relationship between regulation and green sustainable
economy, thus adding to existing literature.

Keywords: clean/healthy environment; green financial legislation; ecological economy; sustainable

development; integration of public policies

1. Introduction
Pollution, environmental degradation, and biodiversity loss are considered inevitable
consequences of the development of human society, most often identified with economic growth.
However, the sustainability of development is defined by the coherence and interdependence of its
three fundamental components, respectively environmental, economic, and social. Thus, the attention
of researchers and practitioners was focused on this interrelationship, reaching a common point that
development will be possible in the future only with the improvement of environmental conditions,
all public policies being oriented towards building a regulatory framework, and especially a financial
regulatory framework that allows this green growth as the development and diffusion of technologies
and products that have environmental benefits.
The role of an effective regulatory financial framework in promoting green sustainable economy
has generated considerable interest among researchers and practitioners in recent years, with the first
studies being connected with economic growth [1–5]. Many studies are developed on the relationship
between the green sustainable economy and its different determinants [6–15]. There are also studies

Sustainability 2020, 12, 8778; doi:10.3390/su12218778 www.mdpi.com/journal/sustainability

Sustainability 2020, 12, 8778 2 of 15

developed with a strong emphasis on the link between environmental legislation and economic
growth [16–20].
Currently, in terms of regulatory framework, the most widely circulated documents are the
Paris Agreement on climate change [21] and the UN 2030 Agenda for Sustainable Development [22],
where the EU has committed to three ambitious climate and energy targets by 2030 that will lead to
sustainability in economies: (i) Minimum 40% cut in greenhouse gas emissions compared to 1990
levels; (ii) At least a 27% share of renewables in final energy consumption; (iii) At least 30% energy
savings compared with the business-as-usual scenario. The implementation of these measures at the
national level requires public policies to be rebuilt based also on green financial legislation.
In this context, building effective national and international financial regulation framework
should take into consideration that it is not simply an issue of the technical design of the regulatory
instruments, but that it is also concerned with the quality of supporting regulatory institutions and
capacity of each country, so that implementation leads to green sustainable development. Thus,
the regulatory framework should be combined with institutional architecture coherence and efficiency.
Otherwise, the study of World Bank [4] pointed that excessive regulation has an inaccurate effect
encouraging entrepreneurs to operate in the informal economy, because heavy regulation is generally
associated with more inefficiency in public institutions generating longer delays and higher cost and
more unemployed people, high corruption, and less productivity and investment, but not with better
quality of private or public goods. However, the study of World Bank [4] concludes there is not found
an optimal level of regulation until now, but it recommends less than what is currently found in most
countries, and especially poor ones.
The novelty of the paper is given by the fact that this paper explores the possible relationship
between financial regulation complexity framework and green sustainable economy for 25 European
Union countries, over the period of time 2000–2018 using an econometric model. Our hypothesis is
that the green sustainable economy is linked, however, to the continuous monitoring and reviewing
financial regulation.
The paper is organized as follows: Section 2 reviews issues in the literature pertinent to the debate
on the role of financial regulation in economic growth; Section 3 provides the status of the European
Union in terms of strategies applied through legal framework; Section 4 describes the method, variables,
and data sources; Section 5 deals with a descriptive analysis of the data and reports the regression
results; and Section 6 provides conclusions and the implications for development policy.

2. Literature Review
World Bank [4] seriously raises the issue of legislation in states with a developed or developing
market economy. The economic theory developed by Hayek [23] suggests that state ownership is
associated with inadequate incentives to gather and use this information to maximize economic welfare.
However, the theory of economic regulation is developed from the 19th century and revealed that
for reducing the market failure the case for public regulation is stronger in developing countries [24].
The World Bank [4] draws the same conclusion, but it links the effectiveness of regulations to institutional
efficiency, which it considers an indissoluble relationship. However, Jalilian et al. [3] consider that
regulation of markets may not result in a welfare improvement as compared to the economic outcome
under imperfect market conditions, where information asymmetries can contribute to imperfect
regulation. Many researchers [25–28] have shown links between law and economics, highlighting
the roles of legal foundations and well-defined property rights for the proper functioning of market
economies. In this regard, La Porta et al. [25] found evidence that legal environment has strong effects
on the size and extent of a country’s capital market. La Porta et al. [26] explains that the legal protection
of investors in a country is a significant determinant of its financial market development. Claessens
and Yurtoglu [29] conclude that the shareholders’ rights are less defined in transition economies than
in emerging markets and developed economies and that better creditor and shareholder rights (by
legal framework) can be associated with deeper and more developed capital markets. Parker [30]
Sustainability 2020, 12, 8778 3 of 15

finds that a well-functioning regulatory system should be the one that balances three important issues:
accountability, transparency, and consistency. Of all these, the variable with a strong qualitative
impact is mainly consistency because consistent regulatory decisions determine public confidence in a
regulatory system. Transparency can also justify the quality of the decision-makers, of the institutions.
This results in the role of states generating green economy [31].
Based on such regulatory legitimacy issues, Kaufman et al. [32] developed a set of governance
variables comprising a set of six aggregate indicators developed by the World Bank and drawn
from 194 different measures to show quality of regulation and quality of governance: (i) Voice and
accountability; (ii) Political instability; (iii) Government effectiveness; (iv) Regulatory quality; (v) Rule
of law; and (vi) Control of corruption. These six aggregate indicators are the most used in scientific
analysis. However, the literature is quite complex in indicators [32,33], which is a positive aspect,
but there is no consistency in the reporting of indicators by year and country, which makes it difficult
to include them in econometric analyses.
Green economy provides a bridge between global environmental priorities and the economic
system. Greening growth is considered necessary, efficient, and affordable [34]. The 1992 UN
Conference on Environment and Development (the Rio Earth Summit) connected environmental and
climate protection objectives with economic development. The concept of “green growth” is found in
literature [35–40], but is also recognized by policymakers as an alternative perspective on the possibility
for advancing welfare while explicitly taking into account environmental constraints [34,41–43].
The relationship of economic and ecological indicators can be explained by the Environmental
Kuznets curve [44], concluding that in countries with rapidly developing economic indicators
(GDP—Gross Domestic Product growth), the environment can be affected and, at the same time,
the demand for cleaner and safer environments grows as the country’s welfare increases [45].
World Bank [34] answers the question of how to make growth greener in two ways: classic literature
invokes environmental taxation, norms, and regulations being the main tools of a green growth strategy
or basic instruments, and modern literature adds technology which is making it easier to implement
classical instruments and monitor their impacts.
On the other hand, World Bank [34] considers that the main obstacles to greening growth are
two, as following: political and behavioral inertia, and a lack of financing instrument. The World
Bank [34] does not identify the cost of green policies as an obstacle as is commonly thought. At the
business level, the cost of environmental regulation to firms is typically modest because organizations
have the ability to adapt and innovate, and in this context, there is no evidence that environmental
regulation systematically hurts profitability. Theoretical studies of ‘80s found negative impacts,
but the empirical, more recent studies find more positive results, partly because of better designed
environmental regulations that promote efficiency gains [46]. Regarding financial regulation is required
to facilitate the best possible financing and financial services supply to the real economy and to society
without endangering the stability and liquidity of the financial sector and society’s trust in financial
markets [47]. Besides regulation, also leadership is key elements to consider in any well-founded
discussion on scaling up private sector investments required for a transition towards a green economy.
Green financial regulation [47] is based on two pillars which interconnect with each other, respectively;
on the one hand, increased pollution and environmental risks affect the stability of the financial sector,
and on the other, regulation is required to force the financial sector to drive global transformation
towards a green economy.
Applying financial regulation for a sustainable green economy, policymakers and regulators
should take into account issues [48] such as: (i) The characteristics of the market economy; (ii) How
the individual organizations are structured and make decisions; (iii) What incentives are likely to
motivate both the affected individuals and organizations to comply with the regulation; and (iv) The
obstacles to their compliance. The effectiveness of regulatory compliance should be based on a few
conditions [48]: (i) the target group has to be aware of the rule and understand it; (ii) the target group
Sustainability 2020, 12, 8778 4 of 15

has to be willing to comply and economic incentives can motivate compliance, and (iii) the target
group is able to comply.
Much has been said in terms of sustainability or environmentally friendly economic development.
Repetto et al. [49] argues that the difference in the treatment of natural resources and other intangible
assets deepens what he considers to be a “false dichotomy between the economy and the environment”
which leads to public policies inclined to put the economic development first at the cost of the
environment. The traditional indicators such as the GDP, which is considered most common and
reliable in terms of economic description, are not connected enough to the new realities and development
growth which includes the environmental and social goals and limitations [50]. Thus, the greening of
the economic growth should meet the goals of real sustainable development and the consideration of
both directions (economic and environment) [51].
Among the different identified possibilities of connecting the environmental issues and the
economic growth, we mention the Sustainable National Income, the National Accounting Matrix
including Environmental Accounts NAMEA, System of Environmental Economic Accounting (SEEA),
the Genuine Savings, the Green GDP, and Carbon Productivity. The vast majority of these possible
solutions of measuring economic growth in connection with the environment suffer from the lack
of accurate measurement of the natural capital depletion and environmental damage. The two
major approaches we consider most feasible and most developed are the green GDP and the
carbon productivity.
Taking into account the environment as an asset being used during the economic reproduction,
the green GDP is a true income explained by Hicks’ concept of income [52] as the excess of asset
consumption. This indicator is one of the most popular when it comes to assess the trade-off between
the environment and the economic growth [53].
Past studies classified and described the green GDP approach in two ways: the GDP that
accounts for the value of ecosystem services or the traditional GDP from which is subtracted the cost
of environmental pollution and resource depletion, but it excludes the value of natural ecosystem
service [54,55].
Kunanuntakj et al. [56] is calculating the green GDP by subtracting the environmental cost from the
traditional GDP. As environmental cost, they identify three components: depletion cost, degradation
cost, and defensive cost.
SEEA identifies the resource depletion cost as the marginal abatement cost per unit for producing
material and energy to compensate the material and energy consumption, environmental degradation
cost as the cost of damage from emissions affecting human health, and ecosystem and defensive cost as
those expenditures involved in environmental protection or emission reduction [57].
The other important approach regarding the inclusion in the economic growth assessment of
environment “consumption” is the carbon productivity, a concept first developed by Kaya and
Yokobori [58] as a ratio between GDP and the quantity of CO2 emissions. The basic idea of the carbon
productivity is to keep the economic growth as “green” as it can be, in terms of carbon emissions,
without affecting the economic output. In other words, to improve the carbon productivity means to
maintain the GDP growth while reducing the carbon emissions [59].
In the literature, there are different voices debating about the carbon productivity’s influencing
factors. For example, some authors discovered that the technological innovation is more important than
the industrial structure of the national economic system [60,61]. On the other hand, Lu et al. [62] discuss
about the impact of energy structure upon the carbon productivity in China. However, they investigate
and describe the socioeconomic determinants of carbon productivity and the discrepancies in terms of
carbon productivity between different provinces of China, but also the beneficial impact of technological
progress [63].
Previous studies have shown that the environmental regulations have an impact upon the carbon
productivity especially in regions with carbon intensive economy [18], confirming the Porter hypothesis
that the compliance efforts due to a strong regulation system in terms of environment can induce
Sustainability 2020, 12, 8778 5 of 15

better efficiency and innovation [16]. Although the positive impact of the compliance needs is widely
accepted there are different opinions supporting the “green paradox.” This theory implies that the
environmental regulation policies regarding carbon intensive use of energy will have a gradual
implementation leading to an acceleration in the usage of fossil energy followed by an increasing
energy supply stimulating the demand [18]. In the opinion of Aidt [64], green taxes as an issue of
financial regulation can internalize environmental externalities and raise revenues.
Related to regulations and regulatory systems, corruption is one of the main factors identified
by previous studies having critical impact upon pollution, energy intensity, and in general upon the
environmental performance of the economic activities [65,66]. It is especially the case for emerging
and developing countries where poor governance and less restrictive regulatory system in terms of
environmental protection is doubled by corruption influencing the dirty industry’s relocation and
so poor carbon performance [67]. Besides its direct impact on green growth, corruption also has the
tendency to alter other variables and delay the transition from carbon intense to green economy [66].

3. Facts
According to the Paris Agreement on climate change [21], the acceding states have assumed “to
undertake rapid reductions thereafter in accordance with best available science, so as to achieve a
balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases in
the second half of this century, on the basis of equity, and in the context of sustainable development
and efforts to eradicate poverty.”
The EU countries tried every year to increase the share of renewable energy in their energy balance
according to the indicative goals of Europe Strategy [68], as can be seen in Figure 1. The scientists
agree that increasing the share of renewable energy leads to a reduction of CO2 emissions. The EU
established 20% of renewable energy in gross final energy consumption for 2020.

Figure 1. Share of renewable energy in gross final energy consumption (%) in EU-28. Source: European
Commission—Eurostat, 2020.

According to Figure 1, some European Union countries have achieved the goal assumed in 2018,
such as: Bulgaria (20.52 vs. 16), Czech Republic (15.15 vs. 13), Denmark (35.70 vs. 30), Estonia (29.996
vs. 25), Croatia (28.024 vs. 20), Lithuania (24.448 vs. 23), Finland (41.162 vs. 38), and Sweden (54.645
vs. 49). Romania, Portugal, Austria, and Hungary have very little left to reach the maximum threshold
assumed. Greece, Italy, Cyprus, and Latvia exceeded in 2018 the goal assumed. The countries with
the highest gap in 2018 compared to the assumed goal of 2020 are Belgium, Ireland, Spain, France,
Luxembourg, Malta, Netherlands, Poland, Slovenia, Slovakia, and the United Kingdom. This indicator
is the one that leads to a reduction of CO2 .
According to Figure 2, for the EU-28 average, the level of Greenhouse gas emissions decreased
from 93.69% in 2005 to 76.76% in 2018. The EU target was 20% less compared to 1990 levels. Greenhouse
gas emissions show slight fluctuations, but there is an obvious downward trend, so there is a premise
to meet the level proposed for 2020. Moreover, 2020 was peculiar in terms of the COVID-19 pandemic,
Sustainability 2020, 12, 8778 6 of 15

which stopped production activities in all areas and transport (air, land, and sea) globally, and we
consider that the level of Greenhouse gas emissions has decreased significantly.

Figure 2. Greenhouse gas emissions, base year 1990, over the period 2005–2018 in EU-28. Source:
computed by authors, based on data of European Commission [69].

Two important indicators are, on the one hand, the Gap between share of World GDP and share of
the World CO2 and, on the other hand, CO2 per 1 bln $ of GDP that are presented in Table 1.

Table 1. EU-28’ shares in CO2 emissions and world GDP (average 2000–2014).

CO2 CO2 per 1 Gap of % of World

% of World % of the
Countries GDP, bln $ Emmissions, bln $ of GDP and % of the
GDP World CO2
kt GDP World CO2
Austria 320,934.1644 0.049 66,913.2158 0.026 0.216869704 0.023
Belgium 387,923.6712 0.094 105,373.6897 0.040 0.283291018 0.054
Bulgaria 91,199.6185 0.022 46,098.83487 0.018 0.551712354 0.004
Croatia 74,861.44298 0.011 20,781.6224 0.008 0.294644697 0.003
Cyprus 22,815.89114 0.006 7341.334 0.003 0.336699435 0.002
Czech Republic 254,199.4169 0.038 114,043.9445 0.044 0.478786545 −0.006
Denmark 209,273.6937 0.032 46,828.3234 0.018 0.236856824 0.014
Estonia 25,932.60676 0.004 17,144.6918 0.007 0.72099623 −0.003
Finland 187,716.6148 0.029 57,629.1052 0.022 0.319178053 0.007
France 2,121,147.703 0.327 358,881.7115 0.139 0.175066131 0.188
Germany 2,939,490.41 0.452 783,894.8345 0.303 0.276032245 0.149
Greece 285,622.5009 0.045 88,975.84353 0.035 0.317441516 0.010
Hungary 190,421.4466 0.029 52,470.3696 0.020 0.293763934 0.008
Ireland 180,465.2903 0.027 40,664.8298 0.016 0.238220168 0.012
Italy 1,915,616.887 0.299 425,905.4263 0.166 0.228130962 0.133
Latvia 34,315.27799 0.005 7365.291733 0.003 0.23019656 0.002
Lithuania 55,849.39588 0.008 13,438.8216 0.005 0.26267409 0.003
Luxembourg 38,120.47252 0.006 10,343.8736 0.004 0.288620277 0.002
Malta 10,262.79012 0.002 2495.271267 0.001 0.252078159 0.001
Netherlands 680,845.3699 0.105 176,952.7963 0.068 0.267743427 0.037
Poland 662,212.2064 0.098 304,767.0591 0.117 0.501064917 −0.019
Portugal 254,822.2622 0.039 56,262.781 0.022 0.228916 0.017
Romania 273,085.6921 0.040 89,963.73333 0.035 0.394062429 0.005
Slovakia 109,652.742 0.016 36,468.55947 0.014 0.37237759 0.002
Slovenia 51,596.43353 0.008 15,293.34573 0.006 0.306881131 0.002
Spain 1,304,849.473 0.200 301,587.7701 0.117 0.241734158 0.082
Sweden 354,114.9901 0.054 49,843.81973 0.019 0.147355511 0.035
United Kingdom 2,111,109.252 0.326 505,872.4287 0.196 0.248101634 0.129
European Union 13,037,348.46 1.999 3,803,603.328 1.472 0.303803661 0.527
Source: computed by authors, based on database of World Bank [70].

According to Table 1, to develop the premises of a sustainable green economy, the Gap of % of
World GDP and % of the World CO2 should be significantly positive. Germany produces 0.452% of
world GDP, being the highest level in the EU-28, but, at the same time, it produces 0.303% of the
world’s CO2 emissions, the Gap of % of World GDP and % of the World CO2 being 0.149, the highest
after France (0.188). France produces 0.327% of world GDP but, at the same time, it produces 0.139%
of the world’s CO2 emissions. Italy produces 0.299% of world GDP and 0.166% of the world’s CO2
Sustainability 2020, 12, 8778 7 of 15

emissions, the Gap of % of World GDP and % of the World CO2 being 0.133. Germany, France, Italy,
and the United Kingdom are the states where the difference between % of World GDP and % of
the World CO2 is over 0.1, being significantly positive. Consequently, these states have managed to
implement public strategies that have created a harmonious correlation between the environment,
social, and economic, having the highest prerequisites for achieving the goal of green sustainable
economy. A Gap level of % of World GDP and % of the World CO2 of over 0.05 is found in Belgium
(0.054) and Spain (0.084). The countries with the Gap of % of World GDP and % of the World CO2
positive in the reference interval (0.050–0.010), such as Austria, Denmark, Croatia, Cyprus, Greece,
Ireland, Netherlands, Portugal, and Sweden, are also on a good path to a sustainable green economy.
The countries included in the reference interval (0.010–0.000), such as Bulgaria, Croatia, Cyprus,
Finland, and Latvia. Lithuania, Luxemburg, Malta, Romania, Slovakia, and Slovenia should carry
out green reforms with very strict implementation strategies, which also create the prerequisites for
achieving the goal of green sustainable economy.
Poland and similar Czech Republic, Estonia, and Poland present a higher share in the world’s CO2
emissions compared with their share in world GDP, the gap being significant negative, respectively
−0.006 for Czech Republic, −0.003 for Estonia, and −0.019 for Poland. These three states are put in a
position to rethink their entire system of public policies and especially financial regulation, so that this
correlation between GDP and CO2 emissions is to be reversed, so that economic growth to be achieved
in conditions of environmental protection.
We can emphasize that in the majority of the EU-28 countries (exception being Czech Republic,
Estonia, and Poland with negative score) their share in the world’s GDP is higher than their share in
the world’s CO2 emissions, being on a good path to sustainability.
Another important indicator is CO2 per 1 bln $ of GDP, where the value of the indicator must
be as close to zero as possible. Thus, Estonia registered an alarming value of 0.72, being the state
where also through the value of the other indicator (Gap of % of World GDP and % of the World CO2 )
demonstrates that very strong green reforms are clearly and rapidly required. Relatively high values
of this indicator are recorded in Bulgaria (0.55), Poland (0.50), and the Czech Republic (0.48). The rest
of the European Union countries registered values below 0.40, the lowest value being in Sweden (0.15).
In accordance with the two indicators under analysis, we can emphasize that 25 of the EU-28
countries have high prerequisites for achieving the goal of green sustainable economy, and Estonia,
Czech Republic, and Poland should improve their green policies immediately.

4. Data and Methodology

The aim of this paper is to provide empirical evidence on the relationship between financial
regulation and a green sustainable economy on the profile of 25 European Union countries, over the
period 2000–2018. In order to examine the channels through which financial regulation may affect
economic growth, we used Ordinary least squares (OLS) regression. The EU-25 countries under analysis
are in alphabetical order: Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. Our choice for EU-25
countries is due to the fact that the European Union adopts a common legislative framework that is
transposed in the member countries, but in implementation there are some differences. The chosen
period (2000–2018) is justified by the fact that it covers the pre-crisis, the world economic-financial crisis,
and post-crisis period of time, but also by the importance of the availability of official databases, as World
Bank’s World Development Indicators database (2020) and European Commission (EUROSTAT, 2020).
The novelty of the research is justified by the choice of the determinants of green sustainable
economy, too. The analytical framework of this paper is built on existing models [3] with some changes
and our econometric model is developed as follows:

ln(yi,t ) = β1 xi1 + ln(βn Economic_Controlsi,t ) + εi,t (1)

Sustainability 2020, 12, 8778 8 of 15

The dependent variable is carbon productivity (CarbonProd), as the literature [58] establishes it
as the inclusion in the economic growth assessment of environment “consumption”, being the ratio
between GDP and the quantity of CO2 emissions. Carbon productivity is considered a vitally important
indicator to measure the quality of economic development because it takes into account on the one
hand the economic growth and, on the other hand, CO2 emission reduction [61], responding to the
desideratum of sustainable green economy. In this context, the way to improving carbon productivity
for a sustainable green economy is to maintain or to raise the GDP growth rate while mandatorily
reducing the carbon emission growth rate [59]. Figure 3 shows the Kernel density estimate.

Figure 3. Kernel density estimate. Source: computed by authors using Stata 15.1.

The kdensity plot also indicates that the dependent variable carbon productivity (CarbonProd)
does not look normal, and to help to make it more normally distributed, we investigated and decided
in accord with Figure 4 that the log transform has the smallest chi-square and the log transformation
would help to make enroll more normally distributed.

Figure 4. Histogram by transformation. Source: computed by authors using Stata 15.1.

We use in our paper the four variables out of six in the World Bank dataset [32] that come closest
to capturing the quality of the outcome and process dimensions of regulation and which are the most
common in the literature for econometric analysis [3], namely: (a) Government effectiveness (Gov_eff );
(b) Regulatory quality (Reg_q); (c) Rule of law (Rule_law); and (d) Control of corruption (Contr_corr).
Another important indicator of financial regulation is economic freedom (EconFree).
The variables added to Equation (1) broadly follow the growth empirical literature, according to
several authors [71–75]. Among the control variables included in most empirical research are initial
Sustainability 2020, 12, 8778 9 of 15

conditions, in terms of the human capital and institutions, based on school enrollment, secondary
(% gross) because secondary education completes the provision of basic education that began at the
primary level, and aims at laying the foundations for lifelong learning and human development by
offering more subject- or skill-oriented instruction using more specialized teachers (Edu). Proxies for
the macroeconomic environment are inflation (Infl), trade openness (Trade), and the government’s
involvement in economic activities (Exp). Qualitative variables can also be added to account for specific
events in a country, as well as data heterogeneity when panel data are used. In our analysis, depending
on the nature of dataset constructed, we make use of all or some of these variables with the aim of
ensuring that our regressions are appropriately specified.
The variables used for robustness checks in our model detailed by the Equation (1) are described
in Table 2.

Table 2. The variables included in the analysis.

Variable Definition Data Source

Carbon Productivity—as a ratio between GDP and the quantity of Computed by authors using
CarbonProd
CO2 emissions. World Bank database [70]
Government effectiveness (Gov_eff ), which show perceptions of
the quality of public provision, quality of bureaucracy,
Gov_eff World Bank [70]
competence of civil servants and their independence from political
pressure, and the credibility of government decisions.
Regulatory quality (Reg_q) which reflects burden on business via
Reg_q quantitative regulations, price controls, and other interventions in World Bank [70]
the economy.
Rule of law (Rule_law) showing respect for law and order,
Rule_law predictability and effectiveness of the judiciary system, World Bank [70]
enforceability of contracts.
Control of corruption (Contr_corr) as perceptions of the exercise of
Contr_corr World Bank [70]
public power for private gain.
EconFree Index of economic freedom. Heritage Foundation [75]
School enrollment, secondary (% gross)—gross enrollment ratio is
the ratio of total enrollment, regardless of age, to the population of
Edu World Bank [70]
the age group that officially corresponds to the level of
education shown.
Inflation, GDP deflator (annual %)—inflation as measured by the
annual growth rate of the GDP implicit deflator shows the rate of
Infl price change in the economy as a whole. The GDP implicit World Bank [70]
deflator is the ratio of GDP in current local currency to GDP in
constant local currency.
Trade (% of GDP)—trade is the sum of exports and imports of
Trade World Bank [70]
goods and services measured as a share of gross domestic product.
Exp General government final consumption expenditure (% of GDP). World Bank [70]
Source: computed by authors.

Table 3a,b provide descriptive statistics for the all variables included in the model for the EU-25
countries, over the period of time 2000–2018.
Sustainability 2020, 12, 8778 10 of 15

Table 3. (a) Pairwise correlations; (b) Summary statistics.

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(1) lCarbonProd 1.000
(2) Contr_corr 0.653 * 1.000
(3) Rule_law 0.675 * 0.953 * 1.000
(4)Reg_q 0.542 * 0.891 * 0.899 * 1.000
(5) Gov_eff 0.662 * 0.939 * 0.939 * 0.871 * 1.000
(6) EconFree 0.354 * 0.641 * 0.686 * 0.834 * 0.621 * 1.000
(7) lTrade −0.171 * 0.015 0.065 0.144 * 0.081 0.366 * 1.000
(8) lInfl −0.373 * −0.275 * −0.307 * −0.242 * −0.336 * −0.204 * 0.016 1.000
(9) lExp 0.449 * 0.495 * 0.478 * 0.401 * 0.548 * 0.131 * −0.094 * −0.307 * 1.000
(10) lEdu 0.499 * 0.550 * 0.543 * 0.458 * 0.549 * 0.385 * 0.125 * −0.278 * 0.401 * 1.000
* shows significance at the 0.05 level.
(a)

N St.Dev Min Max Kurtosis Skewness t-Value

(1) lCarbonProd 475 0.601 13.438 16.481 2.731 −0.370 544.776
(2) Contr_corr 475 15.632 36.041 100 1.863 −0.291 109.556
(3) Rule_law 475 14.636 45.05 100 2.205 −0.524 120.238
(4)Reg_q 475 10.426 48.718 100 2.57 −0.374 175.348
(5) Gov_eff 475 13.12 42.564 100 3.044 −0.644 135.317
(6) EconFree 475 6.795 47.3 82.6 2.788 −0.274 217.409
(7) lTrade 475 0.387 3.816 5.421 1.911 0.067 256.014
(8) lInfl 445 0.999 −6.109 3.765 9.025 −1.181 14.341
(9) lExp 475 0.140 2.477 3.33 3.635 −0.168 465.782
(10) lEdu 449 0.135 4.379 5.099 4.877 1.295 728.91
(b) Source: computed by authors using Stata 15.1.

The econometric analysis with yearly panel data, use, individually and jointly, five quality
dimensions of regulation variables, which are the most common in the literature for defining financial
regulation, was based on a generalized linear model form of regression analysis known as a log-linear
model, respectively OLS regression.
To estimate Equation (1) and structure the results for the baseline growth model, we first solve
the problems of spurious regression. Therefore, the tests for multicollinearity show variance inflation
factor (VIFs) of 1.40 for regressions (1), 1.38 for regression (2), 1.30 for regression (3), 1.40 for regression
(4), and 1.27 for regression (5), meaning a tolerance of 1/VIF lower than 0.1 comparable to a VIF of
10, which means that the variable could be considered as a linear combination of other independent
variables. Also, we note that the economic controls perform reasonably well in the model and check
the robustness.

5. Results and Discussion

In this section, we present the results for estimating the equation stated above. The point of
interest is represented by the implication of regulation on green economy, based on the relationship
between carbon productivity and quality of the outcome and process dimensions of regulation. By
approaching some variables government effectiveness (Gov_eff ), regulatory quality (Reg_q), rule of law
(Rule_law); and control of corruption (Contr_corr). Another important indicator of financial regulation
is economic freedom (EconFree), being considered explanatory variable. Based on these five variables,
we will capture possible interaction between each of them and the green economy.
The process of collecting the data was precise and the reliable sources include World Bank and
Eurostat database, the sample consists of annual data from 2000–2018 and based on panel data analysis,
we test the implication of regulation on the green economy in EU-25 countries. The results of the
regression analysis based on OLS regression for panel data models are summarized in Table 4. We ran
five regressions separately, each of the four alternative includes—along with some other determinants
of the green economy—as explanatory variable: control of corruption (regression 1), rule of law
(regression 2), regulatory quality (regression 3), government effectiveness (regression 4), and economic
freedom (regression 5).
Sustainability 2020, 12, 8778 11 of 15

Table 4. The results of the regression analysis.

(1) (2) (3) (4) (5)

OLS OLS OLS OLS OLS
Contr_corr 0.0181 ***
(0.00176)
Rule_law 0.0207 ***
(0.00176)
Reg_q 0.0214 ***
(0.00242)
Gov_eff 0.0231 ***
(0.00218)
EconFree 0.0252 ***
(0.00365)
lTrade −0.351 *** −0.389 *** −0.431 *** −0.414 *** −0.508 ***
(0.0536) (0.0526) (0.0515) (0.0505) (0.0514)
lInfl −0.0915 *** −0.0748 *** −0.0911 *** −0.0729 *** −0.0843 ***
(0.0206) (0.0213) (0.0223) (0.0206) (0.0227)
lExp 0.537 * 0.542 * 0.788 *** 0.353 1.232 ***
(0.225) (0.220) (0.233) (0.235) (0.239)
lEdu 0.764 *** 0.731 *** 1.066 *** 0.806 *** 1.194 ***
(0.156) (0.149) (0.164) (0.161) (0.183)
_cons 10.06 *** 10.11 *** 7.888 *** 10.23 *** 6.403 ***
(0.679) (0.613) (0.626) (0.699) (0.625)
N 419 419 419 419 419
R2 0.561 0.587 0.528 0.571 0.494
Standard errors in parentheses. * p< 0.05, *** p< 0.001.

Based on the results provided in Table 4, it is noted that in the EU-25 countries, it is a direct
relationship between each indicator of financial regulation and green economy. With respect to the
literature insights [16,18], the study confirmed that regulation could stimulate the green economy.
According to the results of the OLS model, the coefficients of all variables defining the quality
of regulation, such as government effectiveness (Gov_eff ), regulatory quality (Reg_q), rule of law
(Rule_law), control of corruption (Contr_corr), and economic freedom (EconFree) are positive and
statistically significant as predicted by our hypothesis. The p-value is smaller than 0.05 and we can
conclude that the independent variables reliably predict the dependent variable. The value of R-square
as the proportion of variance in the dependent variable carbon productivity that can be predicted from
the independent variables for regression (1) also indicates that 56% of the variance in carbon productivity
can be predicted from the variables control of corruption (Contr_corr), education (Edu), inflation (Infl),
trade openness (Trade), and expenditure (Exp). Regression (2) indicates that approximately 59% of
variance in carbon productivity can be predicted from rule of law (Rule_law), and the other independent
variables (education (Edu), inflation (Infl), trade openness (Trade), and expenditure (Exp)). Regression
(3) indicates that approximately 53% of the variance in carbon productivity can be predicted from the
variables regulatory quality (Reg_q) and the other independent variables ((education (Edu), inflation
(Infl), trade openness (Trade), and expenditure (Exp)). Regression (4) indicates that 57% of the variance
in carbon productivity can be predicted from the variable’s government effectiveness (Gov_eff ) and the
other independent variables (education (Edu), inflation (Infl), trade openness (Trade), and expenditure
(Exp)). Regression (5) indicates that 49% of the variance in carbon productivity can be predicted from
the variables economic freedom (EconFree) and the other independent variables (education (Edu),
inflation (Infl), trade openness (Trade), and expenditure (Exp)).
Sustainability 2020, 12, 8778 12 of 15

Education measured by School enrollment, secondary (% gross) being the foundations for lifelong
learning and human development, by offering more subject- or skill-oriented instruction using more
specialized teachers, has a significant positive impact on carbon productivity on all models, this being
supported by empirical evidence of Jalilian et al. [3].
General government final consumption expenditure (% of GDP) as the indicator of government’s
involvement in economic activities is positive and significant in all four models [1–3,5]. In model 4,
expenditure is positive, but not significant statistically.
With regard to the linkage between inflation as measured by the annual growth rate of the GDP
implicit deflator, it shows the rate of price change in the economy as a whole and carbon productivity,
there has been a marked negative relationship in all specifications of our models. High inflation leads
to significant and permanent reductions in carbon productivity in all our models. Trade openness
defined by the combined share of imports and exports in GDP has a significant negative impact on
carbon productivity in all five models.

6. Conclusions
This study has successfully answered to the research paper objective, respectively to examine the
relationship between regulation and green economy in EU-25 countries, over the period 2000–2018,
the status of green economy and policy implications, testing interconnection between the three main
dimensions mentioned above. In order to examine the channels through which regulation may affect
green economy, the methodology employed in this study is OLS regression and the entire panel data
methodological approach follows the OLS regression assumption. Regulation was described in terms
of five literature-recognized indicators, namely government effectiveness (Gov_eff ), regulatory quality
(Reg_q), rule of law (Rule_law), control of corruption (Contr_corr), and economic freedom (EconFree).
Green economy has been described by carbon productivity, which reflects the ratio between GDP and
the quantity of CO2 emissions. Among the control variables were included education (Edu), inflation
(Infl), trade openness (Trade), and the government’s involvement in economic activities (Exp).
The results indicate a positive and significant relationship between the coefficients of all variable
in all five models, highlighting the contribution of quality regulation on the green economy. In this
context, the results from the five models suggest a strong causal link between regulatory quality and
the green economy and confirm that the standard of regulation matters for economic performance.

Author Contributions: Conceptualization, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; methodology, E.C., M.-B.P.,
A.-C.N., F.-M.N., and I.B.; software, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; validation, E.C., M.-B.P., A.-C.N.,
F.-M.N., and I.B.; formal analysis, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; investigation, E.C., M.-B.P., A.-C.N.,
F.-M.N., and I.B.; resources, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; data curation, E.C., M.-B.P., A.-C.N., F.-M.N.,
and I.B.; writing—original draft preparation, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; writing—review and editing,
E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; visualization, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; supervision,
E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; project administration, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B.; funding
acquisition, E.C., M.-B.P., A.-C.N., F.-M.N., and I.B. All authors have read and agreed to the published version of
the manuscript.
Funding: This research received no external funding.
Conflicts of Interest: The authors declare no conflict of interest.

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