Navigating the Trade-Environment Nexus: Moderating Effect of Digital Payments, Urbanization, and Fiscal Policies

Abstract

This paper investigates the nexus between trade and environmental sustainability, focusing on Asia and Africa, using CO₂ emissions as the key variable and testing the moderating effects through digital payments, urbanization, and government expenditure. The diagnostic test validates the appropriateness of the data. The fixed-effects, random-effects, and GLS estimation baselines show that trade growth reduces the emissions of CO₂ significantly, especially for countries with higher emissions. On the other hand, digital payments and urbanization are significantly and positively related to emissions. Government expenditure shows a mixed effect, but its interaction with trade is likely to amplify the environmental benefit of trade. Quantile regression presents some robustness checks, which provide evidence of the heterogeneity of these effects. While the relationship of population and emissions stands out to be statistically significant at higher quantiles, the relationship of GDP and inflation does not show any significant or consistent impact. The instrumental variables (IV) analysis also ensures that potential omitted variable bias and endogeneity issues are addressed. Therefore, the results emphasize the complex interaction between economic factors and sustainability. The study has a crucial policy implication, especially for high-emitting countries, that balances trade, digitalization, and urbanization to achieve sustainable development.