Financial instability and CO₂ emissions: the case of Saudi Arabia

This study aims to investigate the nexus between financial instability and CO₂ emissions within the multivariate framework in Saudi Arabia’s economy over 1971–2016. Autoregressive Distributed Lag (ARDL) model is used to estimate long-run dynamics followed by Vector Error Correction Model (VECM) to detect the direction of causality. The result of the study reveals that financial instability has an insignificant impact on CO₂ emissions. However, electricity consumption has an adverse impact on environmental quality by producing a huge amount of CO₂ emissions in the atmosphere. The coefficients of oil and non-oil GDPs also suggest that both oil and non-oil GDPs contribute to producing a massive amount of CO₂ emissions. Bi-directional causality is observed among all the core variables of the study. Moreover, the reliability and validity are confirmed by applying several diagnostic tests. This study provides novel findings which not only help to advance the existing literature but can be a particular interest to the country’s policymakers regarding financial sector and its role in environmental degradation.