The Governance-Environment Nexus: A Key to Environmental Sustainability in Asian Nations

Abstract

Governance is a crucial determinant of environmental sustainability, encompassing property rights, a robust judicial system, and effective regulatory frameworks. Inadequate governance characterized by weak law enforcement and political difficulties contributes to environmental deterioration. This study explores the impact of good governance on environmental sustainability in 39 Asian countries from 1996 to 2022. By considering governance indicators such as political instability, regulatory quality, and corruption control, as well as controlling for renewable energy, inbound FDI, and economic growth, the study employs the Generalized Method of Moments (GMM) approach and Dumitrescu-Hurlin Panel Causality Tests to assess causal relationships among variables. Findings reveal that political stability and renewable energy demand contribute to decreased carbon emissions. Conversely, inadequate enforcement of environmental regulations, regulatory loopholes, leniency, corruption, and bribery lead to increased carbon emissions. The study confirms the hump-shaped relationship between income and emissions, supporting the environmental Kuznets curve hypothesis. Moreover, the direct relationship between industrialization and carbon emissions supports the 'environmental transition theory,' highlighting the initial increase in environmental degradation during the transition to industrialized economies. The causality results partially support the governance-led carbon emissions hypothesis in Asian economies. Additionally, the study verifies the existence of the pollution haven hypothesis through the growth-led and FDI-led emissions hypotheses. Green energy and economic growth stimulate inbound FDI across countries. The impulse response function suggests that, except for political stability, other governance factors and controlled variables are likely to decrease carbon emissions in the next decade. A variance decomposition analysis indicates that inbound FDI is expected to cause significant variance shocks in carbon emissions, followed by political stability and industrialization over time. The study underlines the role of good governance in environmental sustainability by highlighting democracy's role in raising awareness and demanding stronger ecological standards.