Testing the asymmetric effect of financial stability towards carbon neutrality target: The case of Iceland and global comparison

In the last decade, the CO2 emissions in Iceland continues to relatively decrease; simultaneously, the country has been one of the highly financially stable country in the world. However, Iceland has higher per-capita CO2 emissions than several other European nations. As a result, the major question arising is, what are the environmental effect of financial stability in Iceland? This research scrutinizes the asymmetric effect of financial stability on CO2 emissions in Iceland. Using the quarterly dataset that span from 1995 to 2019. We employ the nonlinear ARDL and Fourier-based approach to uncover these asymmetric interconnections. The empirical findings of non-linear bound test and Fourier-based approach uncover the evident of cointegration between CO2 emissions and financial stability and other exogenous variables (such as income, energy use, and trade openness). The outcomes of the NARDL showed that a positive variation in financial stability mitigates CO2 emissions, whereas negative variation has a neutral impact on CO2 emissions. Furthermore, the result of other exogenous variables suggested that a positive change in energy use have an increased effects on CO2 emissions while a negative variation in energy use have mitigating effects on CO2 emissions. Also, Positive variation in income triggers CO2 emissions, but a negative variation in income has a neutral effect CO2 emission. Conversely, a negative variation in trade openness have increased effects on CO2 emissions, while a positive change in mitigating effects on CO2 emissions. The Fully modified ordinary least square and Dynamic ordinary least square estimators reveal that energy use and income level increase CO2 emissions, while trade openness and financial stability mitigate CO2 emissions. Policymakers in Iceland should focus their significant efforts on enhancing financial stability to encourage environmental innovation, investment, and technology by reducing the negative effect of financial stability. Furthermore, strengthening the trade liberalization policies toward the flow of green goods and services extends the environmental impacts of trade openness in Iceland. (c) 2023 International Association for Gondwana Research. Published by Elsevier B.V. All rights reserved.

Automated summary

In the last decade, Iceland's CO2 emissions have decreased, and the country has maintained financial stability. However, Iceland still has higher per-capita CO2 emissions compared to other European nations. This research examines the asymmetric effect of financial stability on CO2 emissions in Iceland using a quarterly dataset from 1995 to 2019. The findings show that positive changes in financial stability reduce CO2 emissions, while negative changes have no impact. Additionally, positive changes in energy use and income increase CO2 emissions, while negative changes in energy use and income have mitigating effects. Negative changes in trade openness increase CO2 emissions, while positive changes have mitigating effects.