The role of financial development and good governance in economic growth and environmental sustainability

Abstract

New Zealand's environmental policies and political situation may have had an impact on all energy and non-energy factors that affect economic growth and CO₂ emissions. Therefore, it is important to understand the impacts of these factors on NZ's CO₂ emissions and economic growth, as the interconnectedness of these factors provides policymakers with valuable insights. This study assesses the various influences of energy, financial, government, and other non-energy factors on both economic growth and carbon emissions in New Zealand. To estimate the impact variables, this study uses the autoregressive distributed lag method using annual data from 1990 to 2020. The results suggest that renewable and non-renewable energy consumption, foreign direct investment, and good governance stimulate economic growth. Natural resource rents, on the other hand, have a negative impact on economic growth due to their high cost to the economy. Furthermore, the use of renewable energy, financial development, and good governance significantly reduce CO₂ emissions. The exchange rate also contributes to reducing carbon emissions due to its negative impact on economic growth and trade. Finally, fossil fuel consumption is the major contributor to higher CO₂ emissions. Promoting clean foreign direct investment can boost economic growth and preserve environmental quality when supported by good governance and stable exchange rates.