Environmental Degradation in France: The Effects of FDI, Financial Development, and Energy Innovations

Abstract

This paper explores the determinants of carbon emissions in France by accounting for the significant role played by foreign direct investment (FDI), financial development, economic growth, energy consumption and energy research innovations in influencing CO2 emissions function. In this endeavour, we employ the novel SOR (Shahbaz et al. 2017) unit root test on French time series data over the period 1955-2016 to examine the order of integration in the presence of sharp and smooth structural breaks in the variables. We also apply the bootstrapping bounds testing approach, recently developed by McNown et al. (2018), to investigate the presence of cointegration and the empirical findings underscore the presence of cointegration among the time series. Moreover, we find that FDI has a positive impact, while energy research innovations have a negative impact, on French carbon emissions. Financial development lowers carbon emissions, thereby improving the French environmental quality. FDI degrades the environment, and thus supports the pollution-haven hypothesis in France. Similarly, financial development suggests that financial stability is a required condition for improving environmental quality, so are energy research innovations. Contrarily, energy consumption is positively linked with carbon emissions. However, the relationship between economic growth and CO2 emissions is an inverted-U, which is a validation of the environmental Kuznets curve (EKC).

Keywords: FDI, Carbon Emissions, Financial Development, Energy Research Innovations

JEL Classification: F21, O13, P18, Q43