Does foreign direct investment limit trade-adjusted carbon emissions: fresh evidence from global data

Environmental degradation has been a major concern for nations globally in recent years as carbon emissions have increased. Environmental degradation, if not controlled, is one of the dangers faced by humankind, and achieving sustainable development goals is not possible without improving environmental quality. Thus, reliable carbon emission measurement plays an important role in developing an effective climate strategy to address the current environmental issues. Following the trade-adjusted carbon emission measure, an effective climate strategy can be formulated especially following the 17 United Nation Sustainable Development Goals that are intended to lead to improvements toward a sustainable future. To fill the gap in the literature, we empirically explore the interrelationship between foreign capital flows and environmental quality measured by trade-adjusted consumption-based carbon dioxide (CCO₂) emissions for a panel of 125 countries in 1990–2018 by revisiting the pollution haven hypothesis (PHH). The results obtained using system GMM analysis show that FDI has a significantly positive link with CCO₂ in Asia and Africa, but the links between these two variables are insignificant in the Latin American, Caribbean, and European regions. In the cases of the full-sample and developing countries, a significantly positive relationship is found between FDI and CCO₂. In the case of income-based samples, results reveal that FDI is the cause of environmental degradation in low-income, lower-middle-income, and upper-middle-income countries. These findings suggest that developing countries should adopt environmentally friendly policies to attract foreign investors by setting strict regulations on environmental pollution control to achieve sustainable development goals (SDGs).