Heterogeneous effects of economic policy uncertainty and foreign direct investment on environmental quality: cross-country evidence

Over the last few years, global warming and rapid climate change have become major risk factors that pose a serious threat to global security. A key factor behind these risk factors is greenhouse gases, which emit mainly carbon dioxide (CO). The existing literature seeks to determine the economic and non-economic aspects of CO emissions to prevent environmental degradation. However, the effects of economic policy uncertainty and foreign direct investment on CO emissions are undeniable. This study examines the impact of economic policy uncertainty and foreign direct investment on CO emissions in the panel of 24 developed and developing nations from 2001 to 2019. After verifying cross-sectional dependency and co-integration among parameters, the dynamic seemingly unrelated regression and panel vector error correction model (VECM) Granger causality methods are used for long-run estimates and verify the causal link among variables. Our findings show that economic policy uncertainty, economic growth, trade, and energy consumption adversely impact the environment, while foreign direct investment enhances sample countries’ environmental quality. Furthermore, a bidirectional relationship exists between CO, economic policy uncertainty, economic growth, trade, and energy consumption. In addition, this study observed similar results in a robustness analysis using the dynamic common correlated effects and fixed effect panel quantile regression frameworks. Based on the inclusive outcomes, this study forms significant suggestions for policy implications. Specifically, policymakers should design environmental-friendly trade policies, explore renewable energy options, and implement green investment and financing strategies to improve the environment. Graphical abstract: [Figure not available: see fulltext.]