Exploring the Effects of Economic Policy Uncertainty, FDI, and Energy Use, on Environmental Quality in BRICS

Abstract

Using country-level data, this study examines the role of economic policy uncertainty (EPU) and the contribution of economic growth variables such as foreign direct investment (FDI), energy consumption (EC), and GDP on the environment quality in BRICS: Brazil, Russia, India, China, and South Africa between 2000 and the year 2023. Analyzing the relationships with a focus on short- and long-run dynamics by using a set of the most advanced econometric techniques including cross-sectional dependence tests, the panel PMG-ARDL model, and robustness checks with FMOLS, The findings show that EPU improves environmental quality in the long run by reducing pollution-intensive activities in uncertain times. On the contrary, FDI and EC appear to have a non-negligible negative impact, indicating their role in increasing environmental degradation, especially in fossil fuel-dependent economies with weak environmental regulations. GDP has a more complicated relationship: it is a powerful measure of growth (of how the wealth of nations increases), but also of sustainability. An additional consideration the study highlights is that knowledge based on the creation of green investment is still insufficient in BRICS-alluding to the importance for these nations to adopt stringent environmental regulations, support clean energy, and finance green investments that promote decoupling economic development from environmental damage. Policy implications of these results are discussed in the context of achieving sustainable development in the face of global environmental change. More research is needed to tease out the heterogeneous impacts of such policy uncertainty, as well as to take into account sectoral variation in FDI flows to improve targeted policy response to such environmental type’s effects.