Asymmetric impacts of financial development on CO2 emissions: the moderating role of government effectiveness across 90 countries

In this paper, we analyze the moderating role of government effectiveness in the relationship between carbon emissions and financial development across 90 countries over the period 1996–2016. Using the Method of Moments Quantile Regression (MM-QR) as the primary method, complemented by dynamic and cross-sectional dependence-robust panel estimates, we find that government effectiveness can counteract the adverse environmental effects of financial development. This moderating effect is not linear and weakens monotonically across higher levels of the conditional emissions distribution. We also examine differences across income groups and find that the interaction between financial development and government effectiveness is strongest in lower- and middle-income countries, while it becomes statistically insignificant in high-income countries. The findings offer policy implications for aligning financial development with environmental sustainability through stronger institutional capacity.