Financial outreach, total factor productivity, and carbon dioxide emissions: does ekc hold in middle-income countries?

Abstract

Rising carbon dioxide (CO₂) emissions within middle-income countries (MICs) have intensified concerns about whether economic growth, financial outreach, and productivity improvements can be reconciled with environmental sustainability. The Environmental Kuznets Curve (EKC) framework is instrumental in understanding the growth-environment nexus. This paper re-examines the EKC hypothesis while assessing the roles of financial outreach and total factor productivity (TFP) in influencing CO₂ emissions across 58 MICs over the period 2004–2021.The analysis employs panel quantile-based regression to capture heterogeneous effects across the different points of the emissions distribution, complemented with instrumental-variable quantile-based regression to address potential endogeneity. The baseline results do not confirm EKC hypothesis, instead revealing a U-shaped relationship between income levels and emissions levels across quantiles. However, when endogeneity is accounted for, evidence consistent with the EKC hypothesis emerges. Financial outreach indicators exhibit pronounced distributional heterogeneity: commercial bank branches reduce emission levels at lower and median quantiles but increase them at higher quantiles; ATM expansion consistently lowers emissions across all quantiles; credit supplied to the private sector (PSB) and private credit bureau (PCB) coverage uniformly increase emissions; and deposits reduce emissions at lower quantiles while exacerbating emissions at middle and upper quantiles. In contrast, TFP demonstrates a pronounced and statistically meaningful mitigating effect on emissions across the full distribution. Turning-point estimates confirm a U-shaped income-emissions relationship, with turning points rising monotonically across quantiles. These findings highlight the importance of tailoring financial outreach strategies and prioritising productivity-enhancing, low-carbon technologies to achieve environmentally sustainable growth in MICs.