Net-Zero Transition Pathways in Belt and Road Economies: Insights From Threshold Effects and Heterogeneous Analysis

Abstract

Given the pressing need for economies to mitigate climate change and champion carbon neutrality, this study investigates the threshold effects of financial development and foreign direct investment (FDI) on carbon dioxide (CO₂) emissions in Sub-Saharan Africa (SSA) within the Belt and Road Initiative (BRI) bloc, taking into account the moderating role of the regulatory environment. Drawing on the environmental Kuznets curve and the pollution haven hypothesis, the study utilizes the dynamic generalized method of moments (GMM) modeling, proposed by Arellano and Bover, to analyze panel data from 37 SSA countries spanning 1990–2022. The findings reveal that financial development in the banking, financial, and private sectors, along with FDI outflows, is associated with a reduction in CO₂ emissions. Conversely, FDI inflows are linked to increased CO₂ emissions. A curvilinear relationship is observed, where initial increases in financial development and FDI correlate with higher emissions, which decline beyond a certain threshold. Stronger regulations enhance the positive impact of financial development on reducing CO₂ emissions. Finally, the findings show a significant heterogeneous effect across the SSA regional blocs. These findings underscore the critical need for implementing stringent environmental regulations and promoting sustainable financial practices to mitigate negative environmental impact. This research provides both theoretical and practical insights into fostering a carbon neutrality agenda and advancing Sustainable Development Goal 13.