The Impact of Financial Development, Foreign Direct Investment and Geopolitical Risk on CO2 Emissions: Evidence from Turkey

Abstract

The rise in greenhouse gas emissions, particularly carbon dioxide (CO₂), represents one of the most significant challenges facing humanity's existence in the 21st century. It is crucial to implement the measures to reduce these emissions to achieve environmental sustainability. Turkey, along with many nations, is striving to reduce its CO₂ emissions in accordance with the United Nations' 2030 Sustainable Development Goals. This study explores the effects of financial development (FIN), foreign direct investment (FDI), and geopolitical risk (GPR) on Turkey's CO₂ emissions, using annual data from 1985 to 2022. To investigate long-term relationships among these variables, we apply the RALS-Fourier ADF (RALS-FADF) unit root test, the Fractional Fourier ADL (FFADL) cointegration test, and the Fully Modified Ordinary Least Squares (FMOLS) method. The evidence from the FMOLS show that FIN, FDI, and GPR lead to higher CO2 emissions in Turkey over time. It is concluded that any policies designed to achieve a sustainable environmental quality in Turkey must consider mitigating the negative effects of the financial development, foreign direct investment and geopolitical risks on the environment.