U-shaped Relationship between Financial Development and Greenhouse Gases in Vietnam: ARDL Bound Test Approach

Abstract

This study investigates whether financial development can reduce greenhouse gas emissions without compromising environmental quality in Vietnam. Covering the period from 1990 to 2021, we examined the relationship between financial development and emissions alongside other critical factors such as foreign direct investment, trade openness, gross capital formation, energy consumption, and industrial development. Using the Autoregressive Distributed Lag (ARDL) estimation framework, pollutants (carbon dioxide and nitrous oxide), financial development, and the determinants of these emissions exhibited a long-term co-integrated relationship, whereas the estimations identified a U-shaped relationship between financial development and pollutants in the long term. This finding indicates that environmental degradation initially rises with financial development but starts to decline once a certain level of financial development is achieved, challenging the Environmental Kuznets Curve (EKC) hypothesis for Vietnam. Moreover, foreign direct investment contributes to the reduction of greenhouse gas emissions, whereas gross fixed capital formation and industrial development increase the carbon dioxide footprint. The effects of trade openness and energy consumption on emissions vary between the short and long term. Based on these findings, crucial recommendations for industrial development and gross fixed capital formation are provided to prevent further environmental degradation while promoting sustainable financial growth. This study underscores the importance of financial development in achieving zero-emissions targets and mitigating climate change by decreasing greenhouse gas emissions and reducing environmental impacts.