Journal of Environmental Management 268 (2020) 110712

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Journal of Environmental Management

journal homepage: http://www.elsevier.com/locate/jenvman

Research article

Globalization and carbon emissions: Is there any role of agriculture

value-added, financial development, and natural resource rent in the
aftermath of COP21?
Lei Wang a, b, *, Xuan Vinh Vo d, Muhammad Shahbaz c, d, e, f, Aysegul Ak g
a
School of Economy and Management, Shandong Agricultural University, 271018, PR China
b
School of Business Administration, Shandong Women’s University, 250300, PR China
c
School of Management and Economics, Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing, 100081, PR China
d
Institute of Business Research and Cfvg, University of Economics Ho Chi Minh City, Viet Nam
e
COMSATS University of Islamabad, Lahore Campus, Pakistan
f
Department of Land Economy, University of Cambridge, UK
g
Baskent University, Ankara, Turkey

A R T I C L E I N F O A B S T R A C T

Keywords: Keeping in view the catastrophic effects of environmental degradation, G7 countries agree to implement the
COP21 policy recommendations of the famous Paris Climate Agreement (COP21) in 2015; carbon dioxide (CO2) emis­
CO2 emissions sions are increasing in G7 countries, which is a severe threat for the environment of the world. This study ex­
Agriculture value-added
amines the effects of economic globalization on environmental degradation (CO2 emissions) for G7 countries for
Globalization
Financial development
the period of 1996–2017. We further examine the role of financial development, agriculture value-added, and
Natural resources natural resources in the relationship between economic globalization and CO2 emissions. This study contributes
to the existing literature by providing new empirical evidence on how economic globalization, along with
financial development, agriculture value-added, and natural resources affect CO2 emissions in G7 economies.
This study utilizes novel econometric techniques such as CS-ARDL for short-run and long-run results of the
empirical analysis. The empirical findings show that economic globalization, financial development, and natural
resources increase carbon emissions. In contrast, agriculture value-added decreases carbon emissions. This study
suggests that policies designed for controlling carbon emissions should be absorbed in approximately more than
one year.

1. Introduction investment, and finance are important factors in speeding the process of
openness and liberalization of the economies. Due to the process of
Climate change has posed unprecedented challenges to the survival globalization, we witness a rapid improvement in flows of goods, ser­
and growth of humanity, including extreme weather, loss of species, and vices, and information from one country of the world to others (Lee
food scarcity (Dong et al., 2018, 2019). Faced with this shocking fact, et al., 2015). Countries around the globe are opening their economies by
the Paris Agreement reached at the Conference of the Parties (COP21) in minimizing the restrictions on trade. In addition, economic globaliza­
December 2015 emphasizes that global carbon emissions must peak tion suffers a setback due to an increasing threat of environmental
around 2020 and that temperature changes should be below 2 � C degradation. Therefore, economic globalization is attached to an
(Pachauri et al., 2014). A clear understanding of regional carbon emis­ intensive spread of pollution. The rapid increase in the degree of
sions determinants and patterns is critical for targeting the largest openness by countries expands the world’s economic activities, which
emitters with effective strategies (Dong et al., 2019; Wu et al., 2019). result in environmental degradation. Besides, environmental degrada­
Besides, one of the most discussed and debatable issues in modern times tion significantly affects human lives all over the world (Destek and
in the context of globalization is the integration of economies. Trade, Sarkodie, 2019).

* Corresponding author. School of Business Administration, Shandong Women’s University, 250300, PR China.
E-mail addresses: wanglei86@hotmail.com (L. Wang), vxvinh@yahoo.com (X.V. Vo), muhdshahbaz77@gmail.com (M. Shahbaz), aysegulak@baskent.edu.tr
(A. Ak).

https://doi.org/10.1016/j.jenvman.2020.110712
Received 31 March 2020; Received in revised form 1 May 2020; Accepted 4 May 2020
Available online 14 May 2020
0301-4797/© 2020 Elsevier Ltd. All rights reserved.
L. Wang et al. Journal of Environmental Management 268 (2020) 110712

Similar to other developed countries, the degree of openness in G7 analyses. This is the first study to investigate the role of complementa­
countries increases over the year. On average, the degree of economic riness, such as financial development, natural resources, and agriculture
globalization rises from 63.21 in 1996 to 72.13 in 2017. Among G7 value addition in the relationship between economic globalization and
economies, the United Kingdom is the most open economy with a score CO2 emissions. The study makes various-sided contributions to existing
of 80.10 (Gygli et al., 2019). Nevertheless, on average, over the past 25 literature. First, it explores the relationship between economic global­
years, the degree of economic globalization of G7 economies is 82, ization and CO2 emissions in G7 countries. Second, this study introduces
which is 28% higher than the average degree of economic globalization financial development, natural resources, and agriculture value-added
of the World (63.79). The rapid economic expansion of G7 economies as complementarities of economic globalization in affecting CO2 emis­
over the years exerts a potent threat to its environmental situation. sions. Third, the study uses recently developed second-generation
According to the World Bank (2018), the contribution of G7 countries to cointegration techniques to investigate the issue of globalization, lead­
global economic output increases from 32.7% in 2013 to 58% ($317 ing to CO2 emissions. We use the Pesaran (2015) CD test to check the
trillion) in 2018. This rapid expansion of economic activities boosts cross-sectional dependency as well as Pesaran (2007) panel unit root test
energy demand and results in deteriorated environmental performance to find the integrating properties of the variables. We further use
in G7 countries. G7 economies are among the top energy consumer Westerlund (2007) test for examining the long-run equilibrium between
countries and carbon emitters (24.58% of worldwide CO2 emissions in the variables. To measure the long run and short run coefficients of
2018); specifically, CO2 emissions in G7 economies reach 95 billion variables, Common Correlated Effect Mean Group methods (CCEMG),
metric tons in 2019, accounting for 27.3% of global emissions. Among cross-sectionally augmented ARDL (CS-ARDL), and augmented mean
G7 countries, the USA is the major carbon emitting country with 14.34% group (AMG) tests are also applied. Our empirical results confirmed a
share of worldwide CO2 emissions in 2019 (World Bank, 2018). Hence, long-run relationship between the variables. Economic globalization,
G7 economies have a high degree of openness, get an expansion in natural resources, and financial development add to CO2 emissions.
economic activities, have a great demand for energy. Meanwhile, they Agriculture value-added is negatively associated with CO2 emissions in
are the major carbon emitter. Environmental degradation is a severe the long run.
threat to public health and global warming. The rapid expansion in The remainder of the paper is structured as follows. Section 2 pro­
world output at the rate of 3–4% annual growth causes environmental vides a literature review of previous studies. Section 3 explains the
degradation, which is the primary concern for countries around the theoretical approach and econometric methodology. Section 4 presents
globe, especially for G7 economies. The expansion is World’s output the results, discussion, and conclusion. Section 5 gives policy
over the years and contributes remarkably to CO2 emissions, which recommendations.
result in a 4–6 � C increase in the World’s average temperature (Sachs
et al., 2019). 2. Literature review
In 2015, the G7 countries agree to adopt the policy guidelines in the
Paris Climate Agreement (COP21) in light of the devastating effects of The issue of identifying the determinants of CO2 emissions is inten­
environmental destruction. However, CO2 emissions are increased by sively investigated in the literature. Economic development, FDI,
2.7% in 2018, which is a severe threat to the environment of the world. financial development, trade openness, population density, urbaniza­
Therefore, we require an environment-related technological innovation tion, energy consumption, and deforestation are the most widely
mechanism and afforestation to weaken the negative consequences of recognized factors explaining CO2 emissions (Dinda, 2004; Zhang and
economic globalization on CO2 emissions and balance the nexus be­ Cheng, 2009; Lean and Smyth, 2010; Tang and Tan, 2015; Apergis and
tween the pace of openness and CO2 emissions. Moreover, to abate Ozturk, 2015; Shahbaz et al., 2018; Destek and Sarkodie, 2019; Shahbaz
environmental degradation, countries adopt ecofriendly technologies. and Sinha, 2019). The former studies test the EKC hypothesis on the
However, continuous research and development (R&D) investment are basis of time series and panel data framework (Grossman and Krueger,
required to attain environmental innovation (Arago �n-Correa et al., 1995; Dinda and Coondoo, 2006; Lean and Smyth, 2010). The later
2008). Due to environmental innovation, firms adopt existing cleaner studies introduce energy consumption in the relationship between eco­
technology and can also improve their R&D intensity by inventing new nomic development and CO2 emissions (Zhang and Cheng, 2009; Lean
cleaner technology, which is significantly important to abate environ­ and Smyth, 2010). Recently, the researchers introduce a new set of
mental degradation and reduce energy absorption. Hence, environ­ variables such as FDI, financial development to examine the relationship
mental innovation is strongly related to sustainable performance between economic development and CO2 emissions (Shahbaz et al.,
(Santra, 2017). 2018; Tang and Tan, 2015). Moreover, the issue of possible nexus be­
It is widely recognized that excessive extraction of natural resources tween trade openness and environmental degradation is well docu­
due to the process of industrialization and economic development can mented in the literature (Sushmita et al., 2002; Cadot et al., 2011;
significantly contribute to increasing CO2 emissions (Danish et al., 2019; Gozgor and Can, 2016; Liu et al., 2018; Mania, 2019).
Wu et al., 2017). The excessive use of natural resources imposes However, the bulk of research does not have a clear conclusion of the
serious-environment challenges such as deforestation and global relationship between trade openness and CO2 emissions. For instance,
warming (Dong et al., 2017). Deforestation due to the increase in pop­ Ozokcu and Ozdemir (2017) argue that trade openness exerts a wide­
ulation (Asner et al., 2009; Nepstad et al., 2009) imposes serious threats spread effect on environmental degradation. Sushmita et al. (2002)
to global warming and environmental degradation (Robin et al., 1990). argue that the rapid expansion in a degree of openness by the countries
Hence, it is imperative to analyze the role of agriculture value added and around the world results in pollution; hence, the amount of CO2 emis­
natural resources in the relationship between economic globalization sions increases enormously since, during the process of globalization,
and CO2 emissions in the context of G7 economies. This study aims to countries require more resources. According to Liu et al. (2018), more
investigate the role of CO2 emissions and economic globalization in the degree of trade openness results in the transformation of intensive
presence of financial development, agriculture value-added, and natural pollution industries to developing countries; hence, trade openness de­
resources rents. We test the hypothesis: improving environmental per­ teriorates the environmental quality of developing countries. However,
formance, financial development, and agriculture value-added would a high degree of trade openness does not result in environmental
lessen the positive impact of economic globalization on CO2 emissions. degradation in developed countries. Gozgor and Can (2016) argue that
Moreover, we test the hypothesis: natural resources would further in the long run, more degrees of openness result in environmental
strengthen the positive impact of economic globalization on CO2 emis­ degradation and economic development simultaneously. The literature
sions. To date, the literature examines the impact of economic global­ in this regard can be split into two sets of studies. The first set of studies
ization and other control variables are mostly mentioned in separate investigate the direct relationship between trade openness and CO2

2
L. Wang et al. Journal of Environmental Management 268 (2020) 110712

emissions by including trade openness as explanatory variables of CO2 et al., 2019; Duxbury et al., 1993; Iserman, 1994). However, to date, the
emissions (Grossman and Krueger, 1991, 1993; Suri and Chapman, literature regarding the possible relationship between agriculture
1998). value-added and CO2 emissions is inconclusive. Mahmood et al. (2019)
Few studies are also available to investigate the association between argue that the agriculture sector is a source of reducing carbon emissions
globalization (economic) and carbon emissions but provide conflicting and, hence, helpful in abating environmental degradation. On the con­
empirical findings. Shahbaz et al. (2017a,b) use Chinese data for the trary, Duxbury et al. (1993) argue that the agriculture and livestock
period of 1970–2012 by applying ARDL bounds testing for examining sectors are important sources of CO2 and CH4 emissions. World Bank
the linkage between globalization and CO2 emissions. They find that (2018), states in its report that agriculture sector contributes 73% to
globalization improves Chinese environmental quality by lessening CO2 global nitrous oxide emissions (NO2) and, hence, serves as a major
emissions. In the case of NAFTA countries, Kalayci and Hayaloglu source of environmental degradation.
(2019) investigate the relationship between economic globalization and Moreover, the literature is further extended with the introduction of
carbon emissions. They find that economic globalization deteriorates natural resources in the non-linear model of CO2 emissions’ de­
environmental quality by increasing carbon emissions. Shahbaz (2019) terminants (Danish et al., 2019; Wu et al., 2017). The excessive use of
examines whether the environmental Kuznets curve between global­ natural resources imposes serious-environment challenges such as
ization and carbon emissions using data for Next-11 countries. The deforestation and global warming (Dong et al., 2017). Keeping in view
empirical results indicate that the presence of U or inverted-U shaped the existing literature on the interplay between economic globalization
between globalization carbon emissions varies in various countries. In and CO2 emissions, we hypothesize: economic globalization, agriculture
the case of Asia Pacific Economic Cooperation countries, Hiader et al. value added, financial development, and natural resources are signifi­
(2019) apply CUP-FM and CUP-BC models to investigate the relation­ cantly associated with CO2 emissions of G7 countries.
ship between globalization and carbon emissions considering financial
development as an additional determinant of environmental degrada­ 3. Theoretical background and empirical modeling
tion. Their empirical analysis shows a negative effect of globalization on
carbon emissions and globalization Granger causes environmental 3.1. Theoretical background
degradation. Koengkan et al. (2020) use data for 18 Latin American
countries to examine asymmetric relationship between economic glob­ This section provides details about how independent variables affect
alization and CO2 emissions by applying panel ARDL. Their empirical carbon emissions. In the context of globalization, carbon emissions are
analysis indicates that globalization (economic) improves environ­ increased in different ways. First, globalization increases carbon emis­
mental quality by lowering carbon emissions. Bilgili et al. (2020) apply sions from transportation sector. Second, globalization promotes higher
Markov regime switching models to examine whether globalization in­ consumption and industrial activities which, in turn, deteriorates carbon
creases carbon emissions for the Turkish economy. They note that emissions. Increasing cross-border economic activities increase indus­
globalization is beneficial for environmental quality. trial activity for which electricity and energy consumption are utilized,
In recent years, the literature on the EKC hypothesis is extended to as a result, causes carbon emissions to rise (Huwart and Verdier, 2013).
include some other important aspects, such as financial development. Further, financial development can affect carbon emissions positively.
The omission of this important variable could lead to misleading results Financial sector provides loans not only to consumers but also to
(Jiang and Xiaoxin, 2019). Hence, financial development is added as the financial institutes. It facilitates to encourage consumption of automo­
factor affecting CO2 emissions (Dasgupta et al., 2001; Tamazian et al., biles, properties, and electric appliances. These services provided by
2009; Islam et al., 2013; Shahbaz et al., 2013; Jiang and Xiaoxin, 2019). financial sector cause carbon emissions to rise due to an increase in
Financial development can significantly contribute to the reduction of social consumption. Moreover, through the stock exchange, good per­
CO2 emissions in different ways. First, an improved financial system formances indicate a rise in economic growth, enhance the confidence of
enables countries to transfer funds to projects related to environmental enterprises and consumers, encourage consumption and production
protection. Hence, the improved financial system is a source of activities, leading to increase carbon emissions and lower environmental
improving eco-friendly production technology, which results in quality. Agriculture value added is considered helpful to reduce carbon
improved energy infrastructure and less CO2 emissions (Dasgupta et al., emissions in other ways. First, agriculture sector is a less polluting sector
2001; Islam et al., 2013). Second, government around the globe is in these countries compared to other polluting sectors such as transport
transforming their industrial structure by launching numerous and manufacturing sectors. Therefore, promoting low carbon agricul­
eco-friendly projects to prevent environmental degradation. For this, the ture value-added can reduce carbon emissions and help to achieve Paris
sustained financial system is a prerequisite (Tamazian et al., 2009). agreement. In contrast, over-exploitation of natural resources may
Third, the listed enterprises in stock exchange are supposed to strictly deteriorate environmental quality and increase carbon emissions. The
adhere to government policies related to environmental protection, over-exploitation of natural resources without considering the envi­
which leads to coping with the problem of environmental degradation ronment can cause a negative effect on bio-capacity and also increase
(Jiang and Xiaoxin, 2019). ecological footprints (Destek and Sarkodie, 2019; Bekun et al., 2019).
Nonetheless, to date, the literature on the relationship between With rise in economic growth and extraction of natural resources is
financial development and CO2 emissions is inconclusive. Tamazian considered as deteriorating factor for environment. The general
et al. (2009) find that financial development is an essential factor in regression framework based on our theoretical explanation is given in
abating environmental degradation in the case of transitional econo­ equation-2. To empirically examine the impact of economic globaliza­
mies. Moreover, Shahbaz et al. (2013) also express the opinion that tion on CO2 emissions in the presence of complementarities, the basic
countries need to improve their financial system to mitigate environ­ regression model is given as:
mental degradation. However, contrary to other studies, Jiang and
lnCO2; ​ it ¼ ∅1 lnEGit þ ∅2 lnAGVAit þ ∅3 lnFDit þ ∅4 lnTNRit þ τit (1)
Xiaoxin (2019) find that financial development is positively correlated
with CO2 emissions in the case of emerging and developed economies.
(i ¼ 1 … ….7, t ¼ 1 … …22)
Nevertheless, there is no evidence of a significant association between
In equation (1), i is for cross-sections such as Canada, Germany,
financial development and CO2 emissions in the case of developing
France, Italy, Japan, United States, and the United Kingdom, t is the time
countries. Moreover, there is a certain level of threshold of development
period, such as from 1996 to 2017. ϕ are the coefficients, and τ is the
before financial development exacerbates CO2 emissions.
error term, and ln is natural logarithm. The list of variables is provided in
Moreover, in the literature, agriculture value-added is considered as
Table 1.
an important factor affecting environmental degradation (Mahmood

3
L. Wang et al. Journal of Environmental Management 268 (2020) 110712

Following Gygli et al. (2019), we use de jure and de facto economic product (GDP) which is the value-added of agriculture including fishing,
globalization indices to measure economic globalization. The parame­ livestock production, forestry, cultivation of crops and hunting. Eco­
ters are presented in elasticity forms. The expected elasticity of CO2 nomic globalization (EG) index covers restriction to trade, actual eco­
emissions with respect to economic globalization is positive and in the nomic flows, and capital. On one hand, with regard to EG, actual
range of 0–1, i.e., ∅1 ¼ ​ ∂∂lnCO2
lnEG > 0. The logical reasoning behind the
economic flows cover data on foreign direct investment (FDI), portfolio
positive association between economic globalization and CO2 emissions investment, and trade; moreover. On the other hand, it covers taxes,
is that rapid expansion in the degree of openness results in pollution. import barriers and mean tariff rates on international trade. Financial
Moreover, during the process of globalization, countries require more development (FD) is a broader index that covers not only the efficiency
resources, which significantly affects the environment. Moreover, in the and depth of financial markets and institutions but also its accessibility.
literature, the impact of agriculture value-added on CO2 emission is Natural resources (TNR) include mineral, forest, both hard and soft coal,
debatable (Asner et al., 2009; Mahmood et al., 2019; Nepstad et al., oil and natural gas rents. All the variables are converted into per capita
2009; Robin et al., 1990). Mahmood et al. (2019) argue that agriculture unit and natural logarithm before empirical analysis.
sector is a source of reducing emissions and, hence, it is helpful in
abating environmental degradation. However, Nepstad et al. (2009) and 4. Estimation strategy
Robin et al. (1990) argue that agriculture value-added exerts a positive
impact on CO2 emissions. Therefore, agriculture value added is expected 4.1. Unit root testing
�
to have a positive or negative impact on CO2 emissions ∅2 ¼
In order to employ a relevant unit root test for each variable, it is
�
lnCO2
important to check for slope homogeneity and cross-section depen­
​ ∂∂lnAVA > = < 0 . Similarly, natural resources are the ultimate factor in dence. The issue of cross-section dependence can arise due to unob­
increasing environmental degradation caused by an increase in eco­ served factors shocks from local and global sectors, integration, and rise
nomic activities (Danish et al., 2019; Wu et al., 2017). Hence, natural in economic globalization. Similarly, there can be also the differences
resources are expected to have a positive impact on CO2 emissions (∅ across countries in terms of the structure of the economy and de­
lnCO2
3 ¼ ​ ∂∂lnTNR > 0). This study introduces financial development in the mographics. Therefore, these issues need to be tested before employing
empirical model of CO2 emissions. Based on the existing literature and unit root tests. For this purpose, cross-section dependence test are used
theoretical background, we predict that financial development exerts a by Pesaran (2015) and slope homogeneity test applied by Pesaran and
positive impact on CO2 emissions. Hence, financial development is ex­ Yamagata (2008). The null hypothesis for Pesaran (2015) supports the
independence of cross-sections, and the null for Pesaran and Yamagata
pected to have a positive impact on CO2 emissions (∅ 4 ¼ ​ ∂∂lnCO2
lnFD > 0).
(2008) supports homogenous slope. Similarly, a robust approach such as
Im, Pesaran and Shin (IM et al., 2003), Lewandowski, (2006)
3.2. Data
cross-sectionally augmented Dickey-Fuller (CADF) developed by
Pesaran and Cross-sectionally Augmented Im, Pesaran and Shin
This study uses secondary data set obtained from various sources and
(Pesaran, 2007) test are applied.
covers data from 1996 to 2017 for G-7 countries, including Canada,
Im, Pesaran and Shin (IM et al., 20033) is useful to overcome the
France, Germany, Japan, Italy, the United Kingdom, and the United
issue of heterogeneous slope but cannot solve deals with the problem of
States. The dependent variable is carbon emissions (CO2) (metric tons)
cross-section dependence. Therefore, for cross-section dependence,
which includes emissions stemmed from manufacturing of cements and
Pesaran (2006), cross-sectionally augmented Dickey-Fuller (CADF) is
also fossil fuels such as natural gas, coal and fuel oil. Independent var­
employed. This approach uses averages of cross-sections for first dif­
iables include agriculture value-added (AGVA) to gross domestic
ferences and lagged levels. Besides IPS and CIPS, we also use Im, Pesaran
and Shin by augmenting the cross-sections (Pesaran, 2007). This novel
TABLE-1 approach is effective, especially for heterogeneous slope and
Data sources and units. cross-section dependence. The general form for CIPS is given below as:
Description Unit Source p p
X X
CO2 Emissions Metric tons per capita World Development Indicators ( ΔCAi;t ¼ ϕi þ ϕi Zi;t 1 þ ϕi CAt 1 þ ϕil ΔCAt l þ ϕil ΔCAi;t l þ μit (2)
WDI, 2019) l¼0 l¼1
https://databank.worldbank.
org/source/world-develo where, CAt 1 and ΔCAt l are the cross-section averages. The CIPS sta­
pment-indicators#advancedDo
tistic is given below as:
wnloadOptions
Agriculture Percentage of gross World Development Indicators ( X
n
Value Added domestic product (GDP) WDI, 2019) d 2007 ¼ ​ N
CIPS 1
CDFi (3)
https://databank.worldbank. i¼1
org/source/world-develo
pment-indicators#advancedDo whereas, CDF is cross-sectionally augmented Dickey-Fuller (CADF)
wnloadOptions given in equation (3).
Economic KOF globalization Index (Gygli et al., 2019)
Globalization https://kof.ethz.ch/en/forecasts
-and-indicators/indicators/ 4.2. Westerlund (2007) Cointegration test
kof-globalisation-index.html
Financial Index developed by International Monetary Fund (
Development International Monetary Svirydzenka, 2019) Unlike previous studies, this study employs a more useful approach,
Fund (IMF) https://data.imf.org/?sk¼F803 which is the work of Westerlund (2007) on efficiently heterogeneous
2E80-B36C-43B1-AC26-493C5B slope and cross-section dependence, and it provides long-run cointe­
1CD33B
gration results for equation-1. This approach uses four types of statistics,
Total Natural Percentage of gross World Development Indicators (
Resources domestic product (GDP) WDI, 2019) two each for group statistics and panel statistics. The group panel sta­
https://databank.worldbank. tistics propose a null hypothesis for the whole group, while the panel
org/source/world-develo statistics support the null of at least one cross-section is cointegrated.
pment-indicators#advancedDo The group statistics are denoted by Gt and Ga , while the panel statistics
wnloadOptions
are indicated through Pt and Pa , respectively.

4
L. Wang et al. Journal of Environmental Management 268 (2020) 110712

4.3. Cross-sectionally augment ARDL (CS-ARDL) Table 3

Slope homogeneity test.
The long-run and short-run relationship between carbon emissions, Values
economic globalization, financial development, agriculture value-
Delta_tilde 8.976***
added, and natural resources is established by applying cross-section Delta_tilde Adjusted 9.643***
augment ARDL (CS-ARDL). The CS-ARDL is robust not only for non-
Note: *** is for p-values <0.01.
stationarity and endogeneity but also overcome heterogeneous slope
and cross-section dependence problems and provides efficient results
(Chudik et al., 2017; Chudik and Pesaran, 2015). The equation for
Table 4
CS-ARDL is provided as: Unit root tests.
p
X p
X X
1 Pesaran (2007) CADF
ΔCO2;i;t ¼ πi þ πil ΔCO2;i;t l þ π’il AEVi;t l þ π’il Zi;t l þ εi;t (4)
l¼1 l¼0 l¼0 CO2 2.348* 2.624 – – I(0)
AGVA 2.021 1.949 2.290* 2.506 I(1)
’ ’ EG 1.763 1.974 3.075*** 3.356*** I(1)
The averages for cross-sections are denoted by Zt ¼ ðΔCO2;t ; AEVt Þ ,
FD 2.499** 3.443*** – – I(0)
where AEV is for all explanatory variables such as economic globaliza­ TNR 1.723 2.508 3.935*** 3.809*** I(1)
tion, financial development, and agriculture value-added and total
Pesaran (2007) CIPS
natural resource rents. For robustness analysis, this study also uses two
novel approaches that are also robust to heterogeneous slope and cross- CO2 3.228*** 3.985*** – – I(0)
AGVA 2.902*** 2.872** I(0)
section dependence, non-stationarity, and endogeneity. These novel
– –
EG 1.901 2.483 4.496*** 4.849*** I(1)
approaches are a common correlated effect mean group (CCEMG) by FD 2.995*** 3.450*** – – I(0)
Pesaran (2006) and augmented mean group (AMG) by Eberhardt TNR 2.278* 2.821* – – I(0)
(2012).
Note: ***, **, * is for p-values <0.01, 0.05 & 0.10.

5. Results and discussion

there is no cointegration of the null hypothesis. Table 5 shows that the
null-hypothesis of no cointegration in the model can be rejected (eco­
In the analysis of panel data estimates, cross-sectional dependence is
nomic globalization, agriculture value-added, financial development,
the focus of current environmental economics literature (Ahmad and
natural resources, and CO2 emissions). This result suggests that the
Zhao, 2018; Danish et al., 2019). If we ignore cross-sectional depen­
chosen variables have a long-term association at a 1% level and has a
dence, the results will be unreliable (Pesaran, 2004). To follow recent
long-term impact on CO2 emissions.
studies (Wang and Dong, 2019; Danish et al., 2019), we apply the
Table 6 shows the short-term and long-term estimates of CS-ARDL. In
Pesaran (2015) test to check the cross-section dependence. Table 2
the short run, agricultural value-added coefficient is significantly
summarizes the cross-sectional dependence results and shows that the
negative, which means that agricultural value-added has a negative
null hypothesis without cross-section dependence cannot be rejected
impact on CO2 emissions. A 1% increase in agricultural value-added can
between countries. This suggests that shocks occurring in one sample
result in a reduction of CO2 emissions by 0.177%. In the long run, the
country can spread to other countries. On the other hand, G7 countries
coefficient of agriculture value-added is significantly negative, indi­
do not have homogenous slope coefficients due to varying rates of
cating that CO2 emissions can decrease with agriculture value-added,
growth and technology. This implies that the potential slope homoge­
and a 1% increase in agriculture value-added can result in a reduction
neity of the data cannot be ignored. Table 3 shows the results of the slope
of CO2 emissions by 0.232%. This shows that, over time, the impact of
homogeneity test, showing that for G7 countries, the null hypothesis of
agriculture value-added on reducing CO2 emissions can gradually be
slope homogeneity is rejected, which supports the existence of hetero­
realized. By applying advanced technology and management, agricul­
geneity. Furthermore, the findings demonstrate that the procedures for
ture can sequester carbon and reduce its carbon footprint. Since, agri­
estimating cross-sectional dependency and slope heterogeneity in the
culture production uses fewer fossil fuel energy in G7 countries, hence,
following steps are acceptable.
increasing agriculture value added in G7 countries are associated with
After confirming the cross-sectional dependence and slope hetero­
efficient energy system and ultimately leads to reduction in CO2 emis­
geneity tests, the study examines the integrated level of variables
sions. Jebli and Youssef (2017) and Rafiq et al. (2016) support this result
considered for comparison using three different panel unit root tests.
with a sample of five African countries and 65 countries, respectively,
Table 4 presents outcomes of panel unit root tests, which indicate that
but oppose to the outcomes of Jebli et al. (2016) for Tunisia. Besides, as
some variables at a level have a unit root problem. However, at the first
shown in Table 6, short-run and long-run economic globalization co­
difference, all the variables in the series become stationary.
efficients are significantly positive, which means that as economic
The outcome of the cross-sectional dependency, slope heterogeneity
globalization intensifies, CO2 emissions increase. It also shows that a 1%
test and unit root tests contribute to the implementation of second-
increase in economic globalization increases CO2 emissions by 0.240%
generation co-integration proposed by Westerlund (2007). The
in the short run and 0.218% in the long run. The rapid increase in
second-generation test can detect the co-integration of panel time-series
economic globalization in G7 countries contributes substantially to CO2
data in the cases of cross-independence problems and concludes that
emissions (Gygli et al., 2019). The degree of economic globalization in
G7 countries is significantly higher than the rest of the world’s degree of
economic globalization. These results are supported by Lee and Min
Table 2
Cross-section dependence test.
Variables Statistic Table 5
Westerlund cointegration.
CO2 19.958***
AGVA 2.705*** Group Statistics Panel Statistics
EG 19.973***
Gt Ga Pt Pa
FD 19.296***
TNR 7.151*** 5.567*** 12.859*** 14.894*** 13.657***

Note: *** is for p-values <0.01. Note: *** is for p-values <0.01.

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L. Wang et al. Journal of Environmental Management 268 (2020) 110712

Table 6 According to Dasgupta et al. (2001), an improved financial system is a

Cross-section augment ARDL. source of improving eco-friendly production technology, which results
Variables Coefficients Standard Error P-Values in improved energy infrastructure and less CO2 emissions. Moreover,
according to Tamazian et al. (2009), they find that a sustained financial
Short-run Results
AGVA 0.177** 0.074 0.017 system is a prerequisite for abating CO2 emissions.
EG 0.240* 0.140 0.087 Finally, the error correction term coefficient is statistically signifi­
TNR 0.026*** 0.0075 0.001 cant and negative at and 1% level, which means that CO2 emissions
FD 0.417*** 0.133 0.002 should be resolved in the next year after being affected in the short-run
ECM(-1) 0.89*** 0.0749 0.000
Long-run Results
by around 89%. This indicates a fairly fast integration with the long-
AGVA 0.232** 0.0931 0.013 term equilibrium, which is closely associated with advances in tech­
EG 0.218* 0.132 0.098 nology and government interference.
TNR 0.0328*** 0.011 0.006s Table 7 shows the results of the variables by the augmented mean
FD 0.558*** 0.207 0.007
group (AMG) and common correlated effects mean group (CCEMG). As
Note: ***, **, * is for p-values <0.01, 0.05 & 0.10. seen in Table 6, the long-term outcomes of CS-ARDL method are
consistent with the findings of AMG and CCEMG, as the signs for all
(2014), Dogan and Turkekul (2016), Ozokcu and Ozdemir (2017), variables are identical. The findings obtained from this alternative
Sushmita et al. (2002), and Rahman (2020). They confirm the positive approach, thus, support the previous results provided using CS-ARDL
impact of economic globalization on carbon emissions. According to approach and allow us to assess the robustness of long-term outcomes
Ozokcu and Ozdemir (2017), trade openness exerts a widespread effect using various measurement techniques.
on environmental degradation because of rapid expansion in the degree
of openness results in pollution. Moreover, during the process of glob­ 6. Conclusion and policy recommendations
alization, countries require more resources, which significantly affects
environment. Since, the degree of economic globalization of G7 coun­ The United Nations Framework Convention on Climate Change
tries is increased over the years and higher than other counterparts. (UNFCCC) Parties reaches a notable agreement at COP 21 in Paris to
Moreover, we observe an increasing trend in CO2 emissions. On average, tackle climate change and to accelerate and strengthen the measures and
over the past 25 years, the degree of economic globalization of G7 investments needed to ensure a sustainable low carbon future. The Paris
economies is 82, which is 28% higher than the average degree of eco­ Agreement builds on it and brings all nations together for the first time
nomic globalization of the world (63.79). The rapid economic expansion to make concerted efforts to counter and respond to climate change with
has heightened energy demand and resulted in environmental degra­ enhanced funding for developing countries. This also sets out a new path
dation over the years. in the global climate initiative. The G7 countries share the challenge of
Concerning natural resources, the relationship between natural re­ better depletion of the environmental impact of CO2 emissions and are,
sources and short-run and long-run CO2 emissions is significant and thus, steadfastly committed to an atmosphere of sustainable growth.
positive. It also indicates that an increase of 1% in natural resources rent Therefore, this study examines the relationship between CO2 emissions,
would increase short-run CO2 emissions by 0.026% and long-run by agriculture value-added, economic globalization, natural resources, and
0.032%. It is beneficial because natural resources mining would directly financial development of G7 countries during 1996–2017 by using cross-
cause economic growth and thereby raises CO2 emissions. The contin­ sectional dependence, slope heterogeneity test, Westerlund (2007)
uous subsidies for fossil fuel exploration and production contributes co-integration approach, cross-sectional ARDL, augmented mean group
substantially to CO2 emissions in G7 countries. Building highly polluting (AMG), and common correlated effects mean group (CCEMG). The
coal plants in G7 countries leads to an increase in CO2 emissions over the co-integration results from Westerlund (2007) provide sufficiently sig­
years. This position is advocated in the recent studies of Bekun et al. nificant evidence of the cointegration relationship between variables.
(2019) and Danish et al. (2019). According to Danish et al. (2019), the The empirical results of CS-ARDL show that there is a significant rela­
process of industrialization leads to the excessive use of natural re­ tionship between CO2 emissions, economic globalization, agriculture
sources, which significantly increases CO2 emissions. Moreover, Dong value-added, natural resources, and financial development. The results
et al. (2017) find that the excessive usage of natural resources imposes find that agriculture value-added helps to reduce CO2 emissions while
serious-environment challenges such as deforestation and global economic globalization, natural resources, and financial development
warming. adversely affects CO2 emissions in G-7 countries.
Regarding the environmental impact of financial development, the These results bring significant policy implication by refuting the
coefficient is positive and significant. A 1% increase in financial devel­ ongoing policies in the G7 countries. Currently, G7 countries are among
opment results in an increase in CO2 emissions by 0.417% in the short the top energy consumer and, hence, the largest emitter of CO2 emis­
run, and 0.558% in the long run, which is significant at the 1% level. sions. Specifically, CO2 emissions in G7 economies reach 95 billion
Well-functioning financial mechanism in G7 countries is helpful in metric tons in 2019, accounting for 27.3% of the world. Hence, G7
abating environmental problems in these countries over the years. Well- economies have a high degree of openness, get an expansion in eco­
functioning financial mechanism can effectively mitigate cerebral nomic activities, have a large demand for energy. Moreover, they are the
asymmetry, extend funding networks and enable companies to access major carbon emitter. There is a need to switch the structure of the
loans at a cheaper rate, while dramatically raising CO2 emissions while economy towards more sustainable sources of energy, such as renewable
encouraging the growth of manufacturing size (such as constructing
additional production lines, recruiting more facilities, recruiting more Table 7
employees). Moreover, the growth of financial sector offers more and Robustness tests.
better consumer credit services; thus, enabling them to encourage their Variables AMG CCEMG
intertemporal consumption and purchase more goods, such as real es­
AGVA 0.016** 0.063**
tate, vehicles, and other electrical equipment. That strongly promotes EG 0.449*** 0.525**
the growth of consumer consumption and further rise CO2 emissions. TNR 0.037** 0.0914**
These results are also consistent with Al-Mulali et al. (2015), Bekhet FD 0.55*** 0.59***
et al. (2017), Charfeddine and Kahia (2019), Dasgupta et al. (2001), Constant 0.105*** 0.460***
Wald Test 41.17*** 19.76***
Islam et al. (2013), Tamazian et al. (2009), and Nasir et al. (2019).
Note: ***, ** is for p-values <0.01 & 0.05.

6
L. Wang et al. Journal of Environmental Management 268 (2020) 110712

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