Environmental Science and Pollution Research (2019) 26:10446–10456

https://doi.org/10.1007/s11356-019-04670-9

TREND EDITORIAL

Does quality institutions promote environmental quality?

Hamisu Sadi Ali 1 & Veton Zeqiraj 2 & Woon Leong Lin 3 & Siong Hook Law 4 & Zulkornain Yusop 4 &
Uweis Abdulahi Ali Bare 4 & Lee Chin 4

Received: 2 January 2018 / Accepted: 21 February 2019 / Published online: 19 March 2019
# Springer-Verlag GmbH Germany, part of Springer Nature 2019

Introduction (Lau et al. 2014). Environmental degradation is presently

disturbing the global economy, and considering its adverse
The dynamic relationship between carbon dioxide emissions effects has caused various governments to budget hugely to
and other macroeconomic variables is long established in the control the hazards. Without these environmental problems,
literature, and carbon dioxide is seen as one of the variables the resources earmarked to control related environmental
that captures the environmental conditions in the global econ- problems could be used to achieve other important economic
omy. The manufacturing sector plays a key role in the eco- objectives.
nomic growth of every nation. However, its operation is at- This study investigated the impact of institutional quality
tached to carbon dioxide emissions, which are perceived to be on environmental quality in the developing countries. Several
one of the main causes of environmental harm that can seri- studies were conducted on environmental degradation and its
ously affect and reduce the environmental quality. Achieving determinants. However, little is still known about the roles of
a higher level of economic growth is believed to fall in line institutions in reducing environmental problems. This study is
with higher environmental degradation (Sharma 2011), as different from the existing literature in three ways; first, most
higher economic activities may promote more environmental of the studies in this area focus more on growth, financial
problems. Hence, a political instrument for viable develop- development, and trade openness, and little attention is given
ment is introduced here with the goal of balancing the concept to environmental policy aspects; this is the main focus of this
of economic development, environmental degradation, and current paper. Second, a lot of attention has been given to the
social fairness. Sound and quality environmental policies in developed countries, thereby ignoring the developing coun-
an economy could be one of the key determinant factors for tries where the problems are also/even more evident. Carbon
improving environmental quality (Ibrahim and Law 2015). dioxide emissions are the major cause of global warming
Thus, quality institutions should be considered as inputs for which deteriorates overall environmental condition by deplet-
providing sound legislation that when applied efficiently will ing the ozone layer and hence affecting the health of the gen-
help reduce environmental menace in the global economy eral populace as well. Carbon emissions from the developing
countries will surpass those of the developed countries in the
Organization for Economic Co-operation and Development
Responsible editor: Philippe Garrigues
(OECD) over the next three decades due to their higher rate
* Hamisu Sadi Ali
of economic growth in those countries and their continuous
hamisusadi@gmail.com use of fossil fuels. Part of the reason for choosing developing
countries to study is based on the projection that energy-
1 related carbon dioxide emissions from those countries will
Department of Economics, Faculty of Social Sciences, Ahmadu
Bello University Zaria, Zaria, Kaduna 1044, Nigeria be 127% higher than emissions in the advanced economies
2 by 2040 according to the U.S. Energy Information
Faculty of Economics, University of Prishtine, pn. 10000, St. Agim
Ramadani, Pristina, Kosovo Administration (EIA 2016).
3 The world map in Fig. 1 shows the distribution of less-
Department of Management and Marketing, Faculty of Economics
and Management, Universiti Putra Malaysia, developed countries as shown by the green color; this high-
43400 Serdang, Selangor, Malaysia lights majority of the countries in the global economy fall
4
Department of Economics, Faculty of Economics and Managemen, under the category of developing countries. Despite several
Universiti Putra Malaysia, 43400 Serdang, Selangor, Malaysia studies that have examined the relationship between carbon
Environ Sci Pollut Res (2019) 26:10446–10456 10447

Fig. 1 World map showing the distribution of developing countries

dioxide emissions and other variables, very few studies have place through the levels of social organizations that give more
related carbon dioxide emissions to the quality of the institu- emphasis on environmental conditions and resource regimes.
tions that are providing an efficient regulatory framework to Maximum human security is attained when individuals and
safeguard overall environmental degradation. The rest of this societies aimed to reduce threats to human lives and promote
study is structured as follows: BConceptual framework sec- environment and social rights. From Fig. 2, economic growth
tion^ highlights on the conceptual framework that relate insti- affects environmental degradation which is basically known
tutions and environmental quality. BLiterature review section^ as Environmental Kuznets Curve (EKC). Institutional quality
focuses on the review of the previous related literatures.
BEconometric methodology and the empirical model section^
highlights on the discussions of the models and methodology Rights
Institutional
used in the study (generalized method of moments). Fit

Moreover, the data used in the study, measurement of the Rules

variables, and the data sources were also highlighted in this Interplay

section. BEmpirical results and discussions section^ discusses Decision

the empirical results, and BRobustness checks section^ making
Procedure
Scale
highlighted the robustness checks of the main findings.
Lastly, BConclusion and policy recommendations section^
summarizes the findings and recommends policy suggestions Market
based on the study outcomes. Governance
Governance

Environmental
Change
Conceptual framework Human Security

Institutions could be conceptualized as a composition of Fig. 2 Conceptual framework of the institutions and environmental
rights, rules, and decision-making processes which is taking quality. Source: adopted from Egbetokun and Ogundipe (2016)
10448 Environ Sci Pollut Res (2019) 26:10446–10456

can accelerate the curve to move and attain a turning point environmental quality in the countries studied. Arouri et al.
faster than its normal pass through to achieve desired sustain- (2012) based on 12 Middle East and North African (MENA)
able growth. Vibrant institutions can influence economic countries for the period of 1981–2005 examined the nexus
growth and environmental degradation by suitably guarantee- between carbon dioxide emissions, energy consumption, and
ing the location of polluted industries that may control pollu- economic growth. The empirical result shows that
tion haven. Furthermore, intervention of institutions can pro- consumption of energy has a positive and substantial impact
mote rapid economic growth which may result in the increase on carbon dioxide emissions. The result also shows that
of environmental degradation that can also be checked by the economic growth reveals a quadratic association with the
institutions through proper legislation. level of carbon dioxide emissions in the sample countries.
Lau et al. (2014) examined the impact of quality institutions
and carbon dioxide emissions on economic growth in Malaysia
Literature review for the period 1984–2008, using the bound testing approach. Its
co-integration results showed that variables have a long-term
There are a number of studies that relate carbon dioxide emis- relationship. That means that the variables of institutional qual-
sions to other macroeconomic variables and their numerous ity, carbon emissions, and exports have a positive and
results. Carbon dioxide emissions are considered one of the significant impact on economic growth. When the variables
reliable measures of the environment and its quality in the of carbon dioxide emissions and institutional quality interact,
global economy. Therefore, it is used by different the result also remained positive and significant for economic
researchers in the fields of environmental sciences and growth. This finding means that quality institutions can work
environmental economics. However, since the studies on toward the reduction of carbon dioxide emissions effectively,
this research segment are not much, we reviewed the and hence enhance environmental quality while improving
literature on both the impacts of economic growth on economic development. The Granger causality tests
environmental performance, impact of trade openness on the additionally ratified the contributions of institutional structures
economy and environmental performance, pollution haven in reducing carbon dioxide emissions, institutional quality
hypothesis, and institutional quality and environmental influences economic growth both directly and indirectly
performance. For example, in their quest to test the pollution through the ongoing increased reduction of carbon dioxide
haven hypothesis, Dean et al. (2009) estimate the behavior of emissions.
the factors that affect the location choice for equity joint ven- Ibrahim and Law (2015) examined the effect of trade, in-
tures (EJVs) in China. They used theoretical firm framework stitutional quality, and their marginal effects on carbon diox-
of production and abatement decision and derive a location ide emissions in 40 Sub-Sahara African countries. They ap-
choice model based on data of a sample of EJV projects, plied the system generalized method of moments (system
Chinese efficient charges on water pollution, and Chinese in- GMM). The result revealed that the effect of trade on the
dustrial pollution intensity. The empirical finding reveals that environment was dependent on the quality of the institutions
poor environmental policies attracted the funding of EJVs in in these countries. Indeed, trade openness negatively affected
Hong Kong, Macao, and Taiwan. However, EJVs that are environmental quality in those countries with poor institutions
financed from non-ethnically Chinese basis are insubstantially and tended to benefit those countries with better quality insti-
attracted by the poor standards irrespective of the level of tutions that were sound. Therefore, for those countries with
pollution of the industry. poor institutions to gain the benefits of a positive environmen-
Pao and Tsai (2011) examined the impact of economic tal effect on trade, they must reform their institutions to deliver
growth and financial development on environmental condi- effective performance. Merican (2007) investigated the im-
tion based on panel co-integration approach during 1980 to pact of foreign direct investment (FDI) on the pollution in five
2007 except Russia that the time period ranges from 1992 to ASEAN nations, namely, Malaysia, Thailand, Indonesia,
2007 across BRIC economies. The result in the long run re- Singapore, and the Philippines based on the ARDL
veals that carbon dioxide emissions show that energy con- estimation technique. The main finding revealed that FDI
sumption is elastic and FDI is inelastic. The result further promotes environmental degradation through the escalation
highlights that bidirectional causality exists between carbon of high pollution in the environments of Malaysia, Thailand,
dioxide emissions and FDI, and a unidirectional causal and the Philippines. However, FDI was inversely related with
relationship exists that run from output to FDI. Hence, this pollution in Indonesia and had no significant impact on
research outcome supports pollution haven hypothesis. Zeng pollution in Singapore. Ren et al. (2014) applied system
and Eastin (2012) investigated the impact of direct investment GMM and examine the dynamic impact of FDI, trade open-
(FDI) on environmental condition in developing countries. ness, exports, imports, and per capita income on carbon diox-
The main empirical result shows that production of the firms ide emissions during 2000–2010 in China. The main empirical
in the host countries in the form of FDI enhances the finding shows that increase in the China’s trade sector surplus
Environ Sci Pollut Res (2019) 26:10446–10456 10449

positively influences rapid increase in the carbon dioxide carbon dioxide emissions. Al-mulali and Ozturk (2015) ap-
emissions in the country. Also, high inflow of FDI into the plied a panel co-integration analysis technique across 14
country aggravate carbon dioxide emissions into the country MENA countries and examined the causes of environmental
and the per capita income and China’s industrial output nexus degradation in the region for the time period 1996–2012. The
shows an inverted U-shaped which support environmental Pedroni co-integration test revealed that the variables have
Kuznets curve in the country. long-term relationship. Moreover, the result of FMOLS
The relationship between economic growth, electricity showed that energy consumption, urbanization, trade open-
consumption, urbanization, and environmental degradation ness, and industrial development causes environmental degra-
was examined by Shahbaz et al. (2014). They utilized the dation, while political stability decreases it. The result of the
autoregressive distributed lags (ARDL) approach for the peri- Granger causality showed that the variables have both a long-
od 1975–2011 in the United Arab Emirates (UAE). The find- run and a short-run causality with the ecological footprint.
ing showed that variables are actually related in the long term. The dynamic impact of economic growth, CO2 emissions,
An inverted U-shaped relationship, i.e., the Environmental and foreign direct investment was investigated by Balibey
Kuznets Curve (EKC) exists between economic growth and (2015). The goal was to evaluate the environmental Kuznets
carbon dioxide emissions. This finding means that initially curve hypothesis for Turkey for 1974–2011. The study used
growth increases energy consumption upwards to a given Johansen co-integration, Granger causality tests, and impulse
limit of income after which growth reduces it. Electricity response as well as a variance decomposition analysis of the
consumption leads to a decline in carbon dioxide emissions, vector auto-regression model (VAR) models. The finding,
while urbanization enhances those emissions. Exports which based on causality, revealed that FDI and economic
increase environmental quality via a reduction of carbon growth positively influence carbon dioxide emissions. The
dioxide emissions. The results also reported a feedback findings based on impulse response function and variance-
effect for carbon dioxide emissions and electricity decompositions also supported the same relationship between
consumption, while urbanization and economic growth led these variables. Asongu et al. (2016) used panel ARDL tech-
to more carbon dioxide emissions. Ponce de Leon Barido nique to examine the relationship between energy consump-
and Marshall (2014) investigated the impact of urbanization tion, carbon dioxide emissions, and economic growth across
and environmental policy on carbon dioxide emissions for a 24 African countries. The main finding confirms the existence
sample of 80 countries. They applied fixed and random effect of long-run relationship between energy consumption, carbon
techniques for the period 1983–2005. The findings showed dioxide emissions, and economic growth. Moreover, the
that on average, a 1% increase in urbanization could cause short-run error correction model (ECM) is negative, signifi-
carbon dioxide emissions to increase by 0.95%. Researching cant and less than one as theoretically required. Salahuddin
129 countries, Al-mulali et al. (2015a) examined the dynamic et al. (2015) applied fully modified ordinary least square
impacts of urbanization, economic growth, trade openness, (FMOLS), dynamic ordinary least squares (DOLS), and dy-
petroleum consumption, and financial development on carbon namic fixed effect model (DFE) during 1980 to 2012 across
dioxide emissions. The heterogeneous panel estimation tech- Gulf Cooperation Council (GCC) countries and examine the
nique was applied for the period 1980–2011. A Pedroni co- impact of economic growth, electricity consumption and fi-
integration result revealed that variables have a long-term re- nancial development on carbon dioxide emission. The main
lationship, while DOLS and Granger causality showed that empirical finding shows the existence of positive and long-run
financial sector development promotes environmental quality relations between electricity consumption, economic growth,
in the short run and the long run, hence reducing carbon di- and carbon dioxide emissions. However, a negative and
oxide emissions. Petroleum consumption was found to be the significant relationship exists between financial development
key source of environmental degradation for most income and carbon dioxide emissions. The result further shows that
groups. electricity consumption and economic growth stimulates
Disaggregated renewable electricity production and a car- carbon dioxide emissions; however, development of the
bon dioxide emission nexus was examined by Al-mulali et al. financial sector reduces environmental degradation in the
(2015b) for a sample of 23 European countries for the period sample countries.
1990–2013. Panel co-integration analysis technique was ap- Ozturk (2015) applied panel co-integration approach dur-
plied. The Pedroni co-integration result shows that carbon ing 1990–2012 and empirically examined the nexus between
dioxide emissions, GDP growth, urbanization, financial de- energy consumption, air pollution, and climate change across
velopment, and renewable electricity production are co-inte- the panel of six economically diversified nations. The pooled
grated. Based on a fully modified ordinary least square OLS result signifies that energy consumption and air quality
(FMOLS), the finding shows that financial development, eco- have positive and substantial impact on climate change. The
nomic growth, and urbanization increases carbon dioxide result further highlight that 1% increase in energy consump-
emissions in the long term. However, trade openness reduces tion raises the emission of greenhouse gases by 0.124%,
10450 Environ Sci Pollut Res (2019) 26:10446–10456

carbon dioxide emissions by 0.652%, methane emissions by show that increase in income and energy consumption triggers
0.123%, and nitrous oxide emissions enhance greenhouse gas carbon dioxide emissions in the sample countries. However,
emissions by 0.105 %. However, the fixed and random effect the link between carbon dioxide emissions and population
regression result proved the weakening of air quality growth is statistically substantial in the case of India and
indicators on climate change. Seker et al. (2015) applied Brazil, while same relationship remains statistically insignifi-
autoregressive distributed lag (ARDL) and examined the im- cant in the case of China and Indonesia in the short run and
pact of foreign direct investment (FDI), economic growth, and long run. Moreover, they tested environmental Kuznets curve
consumption of energy on carbon dioxide emissions in Turkey (EKC) hypothesis which reveals that increases in the level of
during 1974–2010. The finding reveals that there is a long-run income in Brazil, China, and Indonesia reduce the level of
relationship among the variables. Moreover, the ARDL long- carbon dioxide emissions.
run coefficient shows that the impact of FDI on carbon diox- Ali et al. (2017) empirically examined the dynamic impact
ide emissions is found to be positive although is relatively of urbanization on environmental quality in Singapore being
small. However, its effects on economic growth and energy the most urbanized country in the world with 100% of its
consumption are quite substantial. Furthermore, the short-run populace living in the urban center. The main empirical find-
result also reconfirmed that of the long run. Farhani and ing suggests a negative and significant impact of urbanization
Ozturk (2015) empirically investigate the causality between on carbon dioxide emissions in the country. This means
carbon dioxide emissions, energy consumption, trade open- urbanization is not a barrier to the environmental condition
ness, financial development, economic growth, and urbaniza- in the country. However, economic growth deteriorates
tion in Tunisia during 1971–2012. They applied ARDL ap- environmental quality through incessant increase of the
proach and examine the long-run relationship among the var- carbon dioxide emissions. Paramati et al. (2017) applied dif-
iables. The main empirical result shows that financial devel- ferent robust panel econometric techniques during 1990–2012
opment increases the level of carbon dioxide emissions. The and examine the impact of renewable energy consumption on
finding also reveals the presence of positive and monotonic output and carbon dioxide emissions of the succeeding fastest
relationship between economic growth and carbon dioxide developing countries in the globe. The main empirical result
emissions in the country. This result does not support the reveals the presence of long-run relationships among the var-
validity of environmental Kuznets curve (EKC) hypothesis. iables. Moreover, renewable energy consumption has a
Ali et al. (2016) applied ARDL and empirically examined positive and significant impact on output and has a negative
the dynamic impact of urbanization on environmental condi- and significant impact on carbon dioxide emissions in the
tion in Nigeria during 1971–2011. The long-run result shows sample countries.
that variables have long-run relationship as null hypothesis Ahmed et al. (2017a) empirically examine the impact of
was rejected. Moreover, the coefficient of long-run result energy consumption in relation to carbon dioxide emissions
shows that urbanization does not have any substantial impact and trade integration across eight (8) countries in the ASEAN
on environmental quality in Nigeria. The result further reveals sub-region. The main empirical finding reveals that environ-
that energy consumption and economic growth have positive mental cost of economic growth is disturbing for most of the
and significant impact on environmental condition in Nigeria, panel member countries. The result further highlight that non-
while trade openness reduces the level carbon dioxide renewable energy consumption is the main contributing factor
emission which directly improves the quality of that deteriorate environmental quality in the ASEAN sub-re-
environment. Zhang and Zhou (2016) empirically examined gion. Salahuddin et al. (2017) applied autoregressive distrib-
the impact of foreign direct investment (FDI) on carbon diox- uted lag (ARDL) bounds testing econometric technique in
ide emissions during 1995 to 2010 across regional and nation- Kuwait and examine the dynamic impact of economic growth,
al level in China. They applied Stochastic Impacts by electricity consumption, foreign direct investment (FDI), and
Regression on Population, Affluence, and Technology financial development on carbon dioxide (CO2) emissions.
(STIRPAT) model. The main empirical finding reveals that The study period is 1980–2013. The key finding reveals that
FDI increases environmental quality through reduction in economic growth, FDI, and electricity consumption have a
the level of carbon emissions in China. Moreover, the result positive and significant impact on carbon dioxide emission
shows that FDI reduces carbon dioxide emissions in the west- in both short and long run. However, VECM Granger causal-
ern region to the eastern and central regions. Hence, their ity result shows that FDI, economic growth, and electricity
finding supports pollution haven hypothesis in the case of consumption strongly Granger-cause carbon dioxide emis-
China. Alam et al. (2016) investigates the dynamic impact sions in Kuwait.
of energy consumption and population growth on carbon di- Ahmed et al. (2017b) empirically investigated the nexus
oxide emissions based on autoregressive distributed lag between carbon dioxide emissions and four of its main contrib-
(ARDL) bound test during 1970 to 2012 across India, uting factors which includes population, trade openness, energy
Indonesia, China, and Brazil. The main empirical finding consumption, and income. They applied fully modified
Environ Sci Pollut Res (2019) 26:10446–10456 10451

ordinary least square (FMOLS) analysis during 1971 to 2013 Econometric methodology and the empirical
across five South Asian countries. The main empirical finding model
reveals that energy consumption, trade openness, and
population stimulate carbon dioxide emissions. This means The key objective of empirical specification is to explain the
these three variables reduce environmental quality of the stages of carbon dioxide emissions and its variations across
sample countries. The result however shows that income has different countries. This goal is based on an empirical model
a negative impact on environmental degradation. They went that allows testing of the main hypothesis regarding. The em-
further and applied innovative accounting approach to pirical model will be the determinant for using time and var-
examine the causality among the variables. The causality ious country measurements of the annual dataset for that esti-
result shows bidirectional causality between energy mation. Since the study data is annual, the likelihood of not
consumption and trade openness. However, the unidirectional learning long-run equilibrium values should be provided due
causality exists running from energy consumption, trade to the slow adjustment of the regressors. The dynamic log-
openness, and population to carbon dioxide emission. linear equation of carbon dioxide emissions that has a lagged
Sinha et al. (2017) empirically examined the dynamic im- dependent variable is estimated to allow room for partial ad-
pact of environmental Kuznets curve (EKC) for carbon diox- justment. To achieve the study objective, the following log-
ide emissions across 11 economies during 1990–2014. This linear equation is specified for carbon dioxide emissions:
study segregates three different forms of energy (renewable,
biomass, and non-renewable) and incorporates urbanization LCEMit ¼ α0i þ γLCEMit−1 þ α1 LINQit þ α2 LYit
and level of openness in trade. The main empirical finding þ α3 X it þ ηt þ λi þ εit ð1Þ
based on generalized method of moments reveals that the
presence of N-shaped relationship between economic growth where LCEM is the log of carbon dioxide emissions,
and environmental degradation across the sample countries. γLCEMit − 1is the lagged dependent variable of carbon dioxide
They went further to analyze the interaction effect among emissions, LINQ is the log of institutional quality, LY is the
biomass energy consumption, trade openness, and economic log of economic growth, and X is the vector of the other
growth. The result shows a negative impact on carbon dioxide control variables [financial development (LFD), trade open-
emissions for the sample countries. In summary, it is deduced ness (LTO), urbanization (LUB), and energy consumption
that most of the literature reviewed above highlight that qual- (LEC)]. While ηt indicates the time specific fixed effect, λi
ity institutions enhances environmental quality, for example, shows country specific effect, i denotes country, and t repre-
Lau et al. (2014), Ibrahim and Law (2015), and Al-mulali and sents the time period. The full specification of the model is
Ozturk (2015). shown using Eq. (2) below:

LCEMit ¼ α0i þ γLCEMit−1 þ α1 LINQit þ α2 LYit þ α3 LFDit þ α4 LTOit þ α5 LUBit þ α6 LECit þ ηt þ λi þ εit
ð2Þ
i ¼ 1…47 and t ¼ 1; ……:; 7

Dynamic panel GMM estimation order serial correlation is conducted. The condition indicates
that the null hypothesis for the first order serial correlation can
The presence of a lagged-dependent variable can cause a cor- be rejected, but for the second order, serial correlation cannot
relation between the regressors and the error term because the be rejected.
lagged-dependent variable depends on μit − 1 which also de- Furthermore, the Sargan test is applied to test over-
pends on the country-specific effect (μi). When Eq. (1) is identification restriction because of too many moment condi-
estimated, it may suffer from Nickell (1981) bias which then tions. Still, an increase in the efficiency of estimation may lead
vanishes, as T approaches infinity. To correct such biasness in to estimation bias. It is thus recommended by Baltagi (2005)
the estimation, one must apply either the generalized method that a subset of these moment conditions should apply in order
of moments (GMM) proposed by Arellano and Bond (1991) to gain from the trade-off of increased efficiency and reduced
or use system GMM by Arellano and Bover (1995). Based on estimation bias. The sample countries used in this study were
these techniques, when the first difference is taken in the Angola, Algeria, Azerbaijan, Albania, Armenia, Bangladesh,
models, the country- and time-specific effects and the simul- Belarus, Botswana, Brazil, Bulgaria, Bolivia, Cameroon,
taneity bias problem is removed. The assumption is that the Congo Dep., Colombia, Costa Rica, Dominican Republic,
original disturbance term in Eq. (1) vit does not correlate with Ethiopia, Egypt Arab Republic, Ghana, Guatemala, Gabon,
the differenced errors. In order to test the validity of the esti- Haiti, Honduras, India, Indonesia, Jordan, Kosovo, Kenya,
mated parameters, post-estimation tests of the first and second Malaysia, Mozambique, Moldova, Mongolia, Morocco,
10452 Environ Sci Pollut Res (2019) 26:10446–10456

Mexico, Namibia, Nigeria, Nicaragua, Pakistan, Paraguay, the positive although it looks ambiguous because the plotting is
Philippines, South Africa, Sri Lanka, Tanzania, Togo, not straight.
Thailand, Turkey, and Venezuela RB. These ranges of coun-
tries were selected based on their characteristics of having
largely poor institutional performance, which may also in- Empirical results and discussions
clude improper environmental regulations when compared to
the advanced industrialized nations like the United States of Table 1 highlights the descriptive statistics of the variables and
America (USA), Germany, Spain, Japan, and France. shows the number of observations, the mean, standard devia-
The 47 countries were also selected based on their similar tion, and the minimum and maximum of the original data for
characteristics of falling into the category of developing coun- the variables. For example, the mean for the two key variables
tries. Secondly, the level of bureaucratic quality and rule of of carbon dioxide emissions and institutional quality
law is still very low and corruption is high when compared to was1.989 and 6.873, respectively.
advanced countries. For example, the average point most of The correlation matrix above shows that the variables of
the developing countries scored in the international country institutional quality, financial development, economic growth,
risk guide (ICRG) data base related to bureaucratic quality is trade openness, urbanization, and energy consumption have a
2%, same is also applicable to the rule of law. However, in the positive and significant correlation with the dependent vari-
case of the corruption index which shows that countries that able (carbon dioxide emissions) as presented in Table 2.
score higher points experience little corruption, e.g., the Before estimating the dynamic panel GMM model, the
United States of America (USA) and the United Kingdom main model for this study, the static panel models for fixed
(UK) scored 5 points on average. Most of the developing and random effects were estimated and their results were re-
countries average score is 2 points which highlight the extent ported in Table 3. The finding shows that there was no any
of corruption in those countries. Moreover, the current level of significant relationship between institutional quality and car-
carbon dioxide emissions globally is mainly concentrated in bon dioxide emissions across the sample countries. However,
the advanced industrialized nations; yet, it is strongly the variables of trade openness, urbanization, and energy con-
projected that in the next few years, that trend will move sumption had a positive relationship with carbon dioxide
toward the developing countries (U.S. Energy Information emissions, which means that increase in these variables sub-
Agency). Therefore, examining that linkage with the quality stantially will lead to more carbon dioxide emissions. The
of institutions in the developing countries is paramount. Hausman test, which is based on the p value (0.057), shows
that the null hypothesis cannot be rejected, which means that
the random effect model was more appropriate than the fixed
The data effect model. The result for the main hypothesis (impact of
institutional quality on environmental quality) is insignificant,
The data used for this study across 47 developing countries which might be due to the static nature of the model. Hence,
was obtained from two different sources and carbon dioxide we applied the dynamic panel model to see whether there
emissions as proxied by CO2 emissions metric tons per capita might then be a variation of the outcome since the dynamic
was obtained from the World Development Indicators data set panel models are considered to be more efficient and robust
(WDI). The variable of institutional quality was obtained from than the traditional static panel model.
the International Country Risk Guide (ICRG) in which three Moving to the Arellano and Bond (1991) and the Arellano
political risk services (PRS) variables, namely, corruption, and Bover (1995) dynamic panel GMM model is reported in
rule of law, and bureaucratic quality, were summed to obtain Table 4 below. We reported both difference and system GMM
the desired indicator of institutional quality following Bekaert estimators in Table 4, but since system GMM is considered
et al. (2005). Economic performance was measured by real more robust and efficient than the difference GMM, our anal-
GDP, and financial development was measured by domestic ysis mainly relied on the system GMM results. Models I and II
credit to private sector as a ratio of GDP. Trade openness was have a one-step and two-step difference GMM, respectively,
measured by total exports and imports as a ratio of GDP, while models III and IV are used for a one-and two-step sys-
urbanization was measured by urban population as a ratio of tem GMM respectively. The main finding based on the system
overall population, and energy consumption was measured by GMM reveals that quality institutions help in reducing the
fossil fuel consumption which included coal, oil, petroleum, amount of carbon dioxide emissions. It also shows that insti-
and natural gas products. The remaining control variables tutional quality has a negative and significant impact on car-
were all obtained from World Development Indicators (WDI bon dioxide emissions. This finding means that a 1% increase
CD ROM 2015). The scatter plot as reported in Fig. 3 in the in institutional quality tends to reduce carbon dioxide emis-
Appendix shows that the relationship between the two main sions by 0.313% in the sample countries. This finding is con-
variables of carbon emissions and institutional quality was sistent with that of Lau et al. (2014) and Al-mulali and Ozturk
Environ Sci Pollut Res (2019) 26:10446–10456 10453

Table 1 Descriptive statistics for the variables

Variables Observation Mean Std-dev Minimum Maximum Unit of measurements

Carbon dioxide emissions 322 1.989 2.112 0.039 9.545 O2 emissions metric tons per capita
Institutional quality 329 6.873 1.657 2.500 12.417 Corruption, rule of law, and bureaucratic quality
(scaled 1–30)
Economic growth 329 1.260 2.400 2.090 1.240 Real GDP
Financial development 329 35.662 25.168 1.095 160.124 Domestic credit to private sector as a ratio of GDP
Trade openness 329 77.909 35.517 22.118 210.374 Total exports and imports as a ratio of GDP
Urbanization 329 52.661 18.060 15.504 88.769 Urban population as a ratio of overall population
Energy consumptions 329 59.921 29.829 2.275 99.848 Fossil fuel consumptions

(2015) who found that quality institutions reduce carbon di- Robustness checks
oxide emissions in Malaysia and MENA countries, respec-
tively. The empirical results further show that the variables As the scatter plot (refer to Appendix (Fig. 4)) shows, some
of economic performance, trade openness, urbanization, and countries move far away from the main sample, so we con-
energy consumption have a positive and significant impact on ducted Cook’s outlier test as advocated by Cook (1977) to
carbon dioxide emissions. This means that a 1% increase in detect any country with high leverage or large residuals.
economic performance, trade openness, urbanization, and en- Some counties were found to have outliers, so we dropped
ergy consumption could increase the level of carbon dioxide the outliers and re-estimated the models. The result as reported
emissions by 0.195%, 0.194%, 1.599%, and 0.304%, respec- in Table 5 shows that even after removing all outliers from the
tively. However, financial development did not have any sig- sample, the main result remained consistent with what was
nificant impact on carbon dioxide emissions in the sample obtained in the full sample as system GMM results. This
countries. means that institutional quality does reduce carbon dioxide
The post-estimation tests of the models were also valid as emissions in the sample countries. That is to say, a 1% in-
we could not reject the null hypothesis for Sargan/Hansen crease in institutional quality could lead to the reduction of
which means the instruments were valid. The second order carbon dioxide emissions by 0.206%. The remaining control
serial correlation AR(2), which is meant to check AR(1), variables also revealed that economic performance could lead
was also valid. This mean was consistent with the GMM to the reduction of carbon dioxide emission, hence improve
econometric theory. However, the main result was insignifi- environmental quality. Statistically, it revealed that a 1%
cant, as quality of institutions did not have any significant
impact on carbon dioxide emissions in the sample countries
Table 3 Institutional quality and carbon emissions in developing
when difference GMM was applied. Moreover, as earlier men-
countries: fixed and random effect models
tioned since system GMM was considered a more robust and
efficient estimator compared to difference GMM, our analysis Variables Fixed effect Random effect
mainly relies on the findings of system GMM.
Institutional quality 0.022 (0.050) 0.005 (0.050)
Economic growth 0.075 (0.054) 0.069 (0.043)
Table 2 Correlations matrix of the variables
Financial − 0.000 (0.021) − 0.004 (0.020)
푂2 INQ Y FD TO UB EC development
Trade openness 0.057* (0.038) 0.067* (0.038)
푂2 1.0000 Urbanization 0.606*** (0.191) 0.773*** (0.156)
INQ 0.1512 1.0000 Energy consumption 0.522*** (1.091)* 0.577*** (0.963)
Y 0.2002 0.2218 1.0000 Number of 320 320
observations
FD 0.5353 0.2918 0.1426 1.0000
Sample period 2004–2010 2004–2010
TO 0.2834 0.1465 − 0.3247 0.3368 1.0000
Number of time 7 7
UB 0.5127 0.0156 0.2081 0.2560 0.1503 1.0000 period (T)
EC 0.6004 0.4213 0.2225 0.4145 0.2701 0.5457 1.0000 Number of 47 47
countries (N)
푂2, carbon dioxide emissions; INQ, institutional quality; Y, economic Hausman test 12.20
growth; FD, financial development; TO, trade openness; UB, urbaniza- (0.057)
tion; EC, energy consumption. *p < 0.05, **p < 0.01, and ***p < 0.001
denote significant at 5%, 10%, and 1% respectively. The R coefficient is *p < 0.05, **p < 0.01, and ***p < 0.001 denote significant at 5%, 10%,
of Pearson correlation and 1% respectively. Figures in parentheses are standard errors
10454 Environ Sci Pollut Res (2019) 26:10446–10456

Table 4 Institutional quality and carbon dioxide emissions in developing countries: dynamic panel GMM estimation

Variables Model I Model II Model III Model IV

Lagged-dependent variable − 0.198*** (0.075) − 0.246*** (0.030) − 0.047 (0.071) − 0.177*** (0.040)
Institutional quality 0.048 (0.173) 0.055 (0.065) − 0.435*** (0.160) − 0.313** (0.131)
Economic growth 0.364*** (0.089) 0.365*** (0.081) 0.245*** (0.037) 0.195*** (0.056)
Financial development − 0.029 (0.037) − 0.029 (0.026) − 0.108*** (0.028) − 0.032 (0.028)
Trade openness 0.300*** (0.094) 0.189** (0.078) 0.307*** (0.115) 0.194** (0.087)
Urbanization 0.321 (0.298) 0.502* (0.302) 1.784*** (0.222) 1.599*** (0.343)
Energy consumption 0.019 (0.152) 0.065 (0.113) 0.194 (0.172) 0.304** (0.151)
Number of observations 230 230 276 276
Sample period 2004–2010 2004–2010 2004–2010 2004–2010
Number of time period (T) 7 7 7 7
Number of countries (N) 47 47 47 47
Number of instruments 28 28 29 29
Sargan test (p value) 16.47 (0.742) 16.47 (0.742) 46.11 (0.001) 46.11 (0.001)
Hansen test (p value) – 17.15 (0.702) – 13.70 (0.882)
AR(2) − 1.01 (0.312) − 0.70 (0.486) 0.03 (0.974) − 0.42 (0.673)

*p < 0.05, **p < 0.01, and ***p < 0.001 denote significant at 5%, 10%, and 1% respectively. The dynamic panel GMM estimator of Arellano and Bond
(1991) is applied for the difference GMM estimations and the Arellano and Bover (1995) is used for system GMM estimations. The two models are
based on two steps. Figures in parentheses are standard errors. All variables are in logarithm form, and the estimations are based on xtabond2 Roodman
(2009) simulation study

increase in economic performance could reduce carbon diox- Conclusion and policy recommendations
ide emissions by 0.035%. That result further highlights that a
1% increase in energy consumption could boost carbon diox- This study empirically examined the dynamic impact of in-
ide emission by 0.411%. Thus, energy consumption increases stitutional quality on carbon dioxide emissions across 47
carbon dioxide emission and indirectly depletes environmen- developing countries, using dynamic panel GMM estima-
tal quality in the sample countries in the study. tions. The empirical finding reveals that institutional quality

Table 5 Institutional quality and

carbon dioxide emissions in Variables Model I (Dif. GMM) Model II (Sys. GMM)
developing countries: dynamic
panel GMM estimation after Lagged-dependent variable 0.145** (0.056) 0.751*** (0.030)
removing outliers Institutional quality − 0.088** (0.037) − 0.206*** (0.041)
Economic growth 0.290*** (0.048) − 0.035* (0.018)
Financial development − 0.065*** (0.019) 0.003 (0.015)
Trade openness 0.199*** (0.027) 0.030 (0.032)
Urbanization 0.303 (0.213) 0.046 (0.087)
Energy consumption 0.540 (0.036) 0.411*** (0.053)
Number of observations 210 252
Sample period 2004–2010 2004–2010
Number of time period (T) 7 7
Number of countries (N) 42 42
Number of instruments 38 36
Sargan test (p value) − 0.824 (0.409) 27.446 (0.149)
Hansen test (p value) 9.29 (0.406) 21.30 (0.238)
AR(2) 17.656 (0.963) 0.165 (0.868)

*p < 0.05, **p < 0.01, and ***p < 0.001 denote significant at 5%, 10%, and 1% respectively. The dynamic panel
GMM estimator of Arellano and Bond (1991) is applied for the difference GMM estimations and the Arellano and
Bover (1995) is used for system GMM estimations. The two models are based on two steps. Figures in paren-
theses are standard errors. All variables are in logarithm form, and the estimations are based on xtabond2
Roodman (2009) simulation study
Environ Sci Pollut Res (2019) 26:10446–10456 10455

reduces carbon dioxide emissions and hence reduces the emissions, it is essential for them to strengthen their institu-
level of environmental degradation in the countries that were tions and then allow them to work effectively. Effective
investigated. This finding means that better and more quality functioning of institutions in these countries will deliver
institutions will help enhance the level of environmental proper laws, regulations, and property rights as well as ways
quality. The finding based on the other control variables to combat corruption, which if systematically followed, will
reveals that an increase in economic performance, trade reduce carbon dioxide emissions, and improve the level of
openness, urbanization, and energy consumption positively environmental conditions in the countries investigated in this
influenced carbon dioxide emissions in the sample countries. study. Moreover, governments in the selected sample coun-
The policy implication based on this finding is that, for tries should try to adopt proper legislations that could en-
developing countries to reduce environmental degradation courage green energy consumption which have little envi-
caused by pollution that emanates from carbon dioxide ronmental problems.

Appendix 1
Fig. 3 Scatter plot of carbon 10
dioxide emissions and
South Africa
institutional quality (2004–2010)
8

Malaysia

Venezuela, RB Belarus
Bulgaria
6

Thailand
4

Azerbaijan Mexico
Mongolia Turkey
Algeria

Egypt, Arab Botswana

Rep.
Dominican Republic
2

Brazil
Costarica Morocco
Armenia
Gabon ColombiaBolivia Moldova Albania
India
Namibia
HondurasAngola
Paraguay Guatemala Philippines
Nicaragua
Nigeria Sri Lanka
Haiti Togo Kenya Ghana
Bangladesh
Cameroon Kazakhstan
Pakistan
Indonesia Jordan`"'
Congo, Dem. Rep. EthiopiaTanzania
0

linear fit 95% CI

2 4 6 8 10
Institutional quality

Appendix 2

S/N Country d1

13 Congo Dem. Rep 0.3191507

26 Jordan 0.1711121
30 Moldova 0.1585734
34 Nigeria 0.1429983

d1 shows high leverage or large residuals of the countries

Congo, Dem. Rep.

.4
.3

Ethiopia
Thailand
Malaysia
Brazil
Haiti
Leverage

Gabon Nigeria
Paraguay Tanzania
Sri Lanka
.2

India
Angola
Morocco Moldova
Bangladesh
Togo
Kenya
TurkeyNamibia
AlgeriaAzerbaijan
Venezuela, RB
Mongolia Jordan`"'
Armenia
Colombia
Honduras
.1

Cameroon
Costarica
Botswana
AlbaniaBelarus
Nicaragua
Dominican
Bolivia
Philippines Republic
Bulgaria Indonesia
Egypt, Arab Rep.
Pakistan South Africa
Ghana
Mexico Kazakhstan
Guatemala
0

0 .05 .1 .15
Normalized residual squared
10456 Environ Sci Pollut Res (2019) 26:10446–10456

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