Income Inequality, Financial Development, and Carbon Emissions: Does Institutional Quality Matter in Belt and Road Economies?

Abstract

Addressing income inequality and environmental degradation is essential for achieving sustainable development. This study examines the effects of income inequality, economic growth, financial development, renewable energy consumption, and institutional quality on carbon dioxide (CO₂) emissions in 37 Belt and Road Initiative (BRI) countries over the period 2002–2020. Employing a two-step system generalized method of moments (GMM) estimator, the study investigates the influence of socioeconomic and institutional factors on environmental sustainability. The findings reveal that income inequality and renewable energy consumption significantly reduce CO₂ emissions, whereas economic growth and financial development contribute to environmental degradation. Industrialization increases emissions in certain model specifications, while urbanization generally exhibits a positive association with emissions. Regarding institutional quality, control of corruption, voice and accountability, and political stability are positively associated with CO₂ emissions, whereas government effectiveness and the rule of law exhibit negative effects in selected models. Furthermore, the legal system, political system, and overall institutional quality indices are positively associated with emissions. The positive coefficient of squared economic growth provides no support for the Environmental Kuznets Curve (EKC) hypothesis. These findings highlight the importance of expanding renewable energy adoption, strengthening environmentally effective governance, and redirecting financial resources toward green investments. The study offers policy insights for promoting low-carbon economic development and environmental sustainability across BRI economies.