Financial Instability and CO2 Emissions in India: Evidence from ARDL Bound Testing Approach

The purpose of this study is to explore the relationship between financial instability and carbon dioxide (CO2) emissions in India from 1980 to 2020. The Autoregressive Distributed Lag (ARDL) model is used to measure long-run and short-run dynamics, followed by the Vector Error Correction Model (VECM) to determine the causal direction. As per the findings of the study, financial instability has an insignificant effect on CO2 emissions. However, economic development, energy use, and urbanization have a detrimental effect on environmental quality because it releases a significant amount of CO2 emissions into the environment. Our empirical findings confirmed the presence of an environmental Kuznets curve. The outcomes of the VECM show that the long-run causality can be noticed in CO2 emissions, financial instability, energy use, and urbanization. Furthermore, the validity and reliability of the results were verified by using a variety of diagnostic tests. This research presents novel results that add to the current literature and may be of particular importance to the country's policymakers regarding the financial system and its importance in environmental problems.