Does Financial Stability Matter for Environmental Degradation?

Abstract

There is a body of evidence that financial development contributes to the quality of the environment, either positively or negatively. However, a limited number of studies consider the effect of financial stability or financial risk on environmental degradation. As part of the proposed research, the present study contributes to the existing literature on asymmetric financial stability's impact on Ireland's environmental quality, as a major gap needs to be added to the literature. Based on this aim, the present study explores the effect of financial stability on environmental degradation in Ireland while controlling primary energy consumption, economic growth, and renewable energy in Ireland. The study employs a novel Fourier autoregressive distributed lag model (FARDL) approach for Ireland, covering the period 1990Q1-2019Q4 with quarterly data. FARDL cointegration test results indicate a long-term relationship between financial stability, primary energy consumption, renewable energy consumption, and CO2 emissions. The outcomes from the long-term coefficient estimation model based on the FARDL model reveal that (i) financial stability leads to a decrease in environmental degradation in Ireland; (ii) renewable energy consumption promotes environmental sustainability; (iii) primary energy consumption has a negative effect on Ireland's environmental quality. These results denote that Ireland should enhance financial stability and promote renewable energy to reduce fossil fuel consumption to achieve net-zero targets by 2050. Ireland to implement long-term financial stability policies to fill the emission gap and achieve a net zero emissions target by 2050. Specific policy recommendations for Ireland's environmental policies are also discussed in the study.