Do Income Inequality and Institutional Quality affect CO2 Emissions in Developing Economies?

Concerns about income inequality and environmental pollution have stayed important aspects in reaching sustainable development objectives. However, economies continue to struggle with income inequality reduction and environmental degradation mitigation, all of which need significant consideration. Hence, the purpose of this research is to look into the relationship between income inequality, institutional quality, and carbon dioxide (CO2) emissions in 42 developing countries from 1984 to 2016. Furthermore, the current study also investigates the role of institutional quality in moderating the relationship between income inequality and CO2 emissions. For empirical analysis, we used cross section dependence, cross section unit root, and Westerlund's cointegration test to confirm the cross section dependence, stationarity, and cointegration among variables. Moreover, for long-run estimates, we employed Driscoll Kraay regression. According to the Driscoll Kraay regression outcomes, rising income inequality (without interaction term) leads to rising CO2 emissions. However, (with interaction term) it shows a significant negative effect on CO2 emissions. The findings of the interaction term (LnISQXLnINE) disclose a significant negative effect on CO2. Moreover, an increase in institutional quality, economic development, energy consumption, industrialization, and trade openness significantly increase CO2 emissions in all the models. In addition, the square term of income inequality and economic growth depicts an inverted U-shaped association with CO2 emissions. The outcomes are also verified by the robustness check results acquired employing the fully modified ordinary least squares (FMOLS) and pooled mean group (PMG). Furthermore, Dumitrescu and Hurlin's panel causal test reveals a bidirectional causality running from income equality, energy consumption, industrialization, economic growth, trade, and interaction term toward CO2 emissions. In view of the sustainable development goals (SDGs), the findings proposed significant policy repercussions for the study's sample economies.