The Drivers of Decoupling: The Influence of Political factors on CO2 Emissions using a two-way fixed effect approach

Abstract

The fight against climate change and the subsequent discussions about sustainable growth have been ongoing for decades. While multiple countries have successfully achieved sustainable growth, which is described as decoupling in the literature, it is still unanswered which factors are the key driving forces. With six World Governance Indicators that can capture various dimensions of political influence, we aim to study the effect of political indicators on the growth rate of CO2 emissions. A panel data set of 163 countries is employed and the research utilizes a two-way fixed effect model to demonstrate that political indicators have a negative relationship with the growth rate of CO2 emissions. Our results are heterogeneous across industries and income levels of a country; the effects are more vital for the industry sector and high-income countries. Overall, the results of the study indicate that countries with higher political indicators exhibited lower CO2 emissions. This suggests that strong political factors can explain the achievement of decoupling to a certain extent. We conclude that the results are consistent with previous findings and with our expanded interpretation of the Environmental Kuznets Curve hypothesis.