An inverted u-shaped relationship between carbon dioxide emissions and economic growth: The role of institutional quality in developing countries

Abstract

In the context of developing countries striving to balance economic growth and environmental protection, this study investigates the relationship between carbon dioxide (CO₂) emissions and economic growth, with a particular focus on the moderating role of institutional quality in developing countries. Using panel data from 74 developing economies spanning the period 1995 - 2021, sourced from the World Bank, the analysis reveals two key findings. First, there is evidence of a U-shaped relationship between CO₂ emissions and economic growth, indicating that at early stages of development, growth tends to increase emissions, but beyond a certain point, further growth leads to reduced emissions. Second, institutional quality is shown to play an important role in reducing the carbon dependency of growth. The greater the institutional quality, the weaker the positive relationship between economic growth and CO₂ emissions. This suggests that improved institutions could allow developing nations to follow a less carbon-dependent, more sustainable development path. Such implications for policy carry considerable importance for balancing economic development and environmental sustainability.