Failure to control economic sectoral inefficiencies through policy stringency disrupts environmental performance

Abstract

The developmental agenda of emerging countries often depends heavily on natural resource exploitation - a situation that hampers environmental performance. Hence, maximizing economic sectoral yield while reducing overdependence on fossil fuels and resources is essential to reducing wastage. Here, we assess the economic sectoral impact on emissions while controlling for foreign direct investment and energy utilization from 1990 to 2018. Besides, we investigate the role of environmental policy stringency in ameliorating environmental performance in a carbonized and energy-intensive economy where fossil fuels outweigh renewables. Agrarian, industrial, and energy sector dynamics are found to offshoot CO₂ emissions by 0.12%, 0.14%, and 0.20% whereas service sector productivity declines CO₂ emissions by 0.34%. We observe fossil fuel dominated energy portfolio with limited clean and renewable energy diversification that hinders long-term environmental performance. The validation of the pollution halo hypothesis implies that FDI inflows are possibly embedded with green and abatement technologies that reduce emissions while improving environmental performance. Thus, a comprehensive masterplan on climate change mitigation will comprise sectoral-specific resource investment that maximizes productivity while reducing natural resource exploitation, energy, and carbon-intensity.

Keywords: Dynamic ARDL simulations; Environmental performance; Environmental policy stringency; Foreign direct investment; Kernel regularized least squares; Sectoral accounting.