Abstract
Environmental degradation, driven by the accumulation of greenhouse gases (GHGs), poses serious threats to Egypt’s infrastructure, agriculture, and human health. This study investigates the determinants of environmental degradation in Egypt, focusing on the nonlinear impacts of financial development, urbanisation, and economic growth on CO₂ emissions over the period 1965–2022, considering Egypt’s Vision 2030, which places great emphasis on environmental considerations.
The relationship between financial development and greenhouse gas (GHG) emissions remains controversial. Some studies suggest that financial development can reduce carbon emissions by supporting cleaner technologies, while others argue it worsens environmental quality by stimulating industrial expansion and energy use. Recent literature indicates that this relationship may be nonlinear, following either a U-shaped or inverted U-shaped pattern. A U-shaped curve implies that early financial development reduces emissions before eventually increasing them. In contrast, an inverted U-shaped curve suggests that emissions rise initially before declining as the financial sector matures enough to finance green technologies. Similarly, urbanisation significantly affects CO₂ emissions, where urban growth could be beneficial for improving infrastructure efficiency and reducing pollution. In contrast, ecological modernisation theory contends that environmental degradation occurs in early development stages but later improves through technological progress and structural transformation. This relationship may also be nonlinear, often represented by an inverted U-shape.
The Environmental Kuznets Curve (EKC) hypothesis is extensively used in environmental economics literature to explore the nonlinear relationship between economic growth and environmental degradation, where pollution first increases with income, then declines after reaching a threshold, yielding U-, inverted U-, N-, or inverted N-shaped relationships depending on the empirical context. The thesis employs the Nonlinear Autoregressive Distributed Lag (NARDL) model to capture both short- and long-run asymmetries that previous studies have largely neglected. The study incorporates key control variables—GDP per capita, energy consumption, and trade openness—and employs CO₂ emissions as a proxy for environmental degradation. Furthermore, financial development is measured by domestic credit to the private sector to total credit, whereas urbanisation is expressed as urban population to total population.
We hypothesise the following: (1) financial development and urbanisation have asymmetric effects on CO₂ emissions; (2) economic growth exhibits a nonlinear relationship with environmental degradation; (3) energy consumption intensifies environmental degradation; and) the effect of trade openness depends on offsetting scale and composition effects.
The empirical findings confirm the study's main hypotheses. Firstly, the results reveal an N-shaped Environmental Kuznets Curve (EKC) with two distinct turning points—the first at LE17, 395.64 (1973–1975), when economic growth began to coincide with environmental improvements, and the second at LE50, 728.65 (2007), when growth once again became associated with rising emissions—indicating that Egypt is currently in the third phase of the Environmental Kuznets Curve, where the scale effects outweigh both the structural and technological impact. unless strong corrective policies are enacted, intensifying environmental degradation will occur. Secondly, the analysis confirms the asymmetric role of financial development: while it does not significantly affect emissions in the long run, both positive and negative shocks contribute to greater environmental degradation in the short run, suggesting that Egypt’s financial sector still lacks effective green financing mechanisms and regulatory incentives for environmental sustainability. Thirdly, positive shocks to urbanisation are found to improve environmental quality in the long run but worsen environmental conditions in the short run due to increased energy demand; negative shocks have no significant effect. Furthermore, energy consumption is confirmed as the most consistent driver of environmental degradation, underscoring Egypt's heavy dependence on fossil fuels. In contrast, trade openness mitigates CO₂ emissions in both the short and long run, most likely through technology transfer and a composition effect that favours less emission-intensive sectors.
Overall, the findings highlight that achieving Egypt’s environmental sustainability goals requires deepening financial reforms, promoting green credit instruments, advancing renewable energy deployment, and strengthening urban planning policies to balance economic growth with environmental considerations.
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