Environment and Interdisciplinary Development

Impact of Environmental Quality on Economic Growth with an Emphasis on the Role of Mediating Variables

Document Type : Original Article

Authors

Seyed Kamal Sadeghi
Suhd Qasim Ghantab Al-magsoosi

Department of Economics, Faculty of Economics and Management, Tabriz University, Tabriz, Iran

https://doi.org/10.22034/envj.2025.509075.1477
Abstract
Introduction: Identifying the causes and factors of economic growth, especially in developing countries, has always been an important concern of researchers and policymakers. The importance of this issue is more prominent in regions that have lower economic growth such as developing countries. One of the factors that can affect economic growth is environmental quality, and in particular, greenhouse gases emissions. Environmental quality can affect economic growth through several channels. The most important of these channels include health, FDI, and technological innovation. Accordingly, considering the importance of economic growth on the one hand, and the possibility of direct and indirect impacts of CO2 emissions on economic growth on the other hand, this study aims to investigate the effect of carbon dioxide emissions on economic growth by emphasizing on three channels of health, foreign direct investment and technological innovation in Iran during the period 1981-2023 applying a time series data regression approach based on generalized method of moments.
Materials and Methods: The general form of the model used in this study is an improved form of Acheampong and Opoku (2023) model which is estimated applying Generalized Method of Moments (GMM). The reason for using this method is that this approach has high flexibility and requires few initial assumptions. In addition, this estimator is used in models in which endogeneity resulting from estimating specific unobservable effects and the inclusion of lagged dependent variable as an explanatory variable is a fundamental problem. After estimating the four models in question, the Sobel test is used to examine the mediating role of the three variables.
Results: According to the results, the impact of carbon dioxide emissions on economic growth is inverted U-shaped. This means that up to a certain level of pollution, a decrease in environmental quality leads to an increase in economic growth, and after reaching a threshold level, an increase in pollution is associated with a decrease in economic growth. Also, an increase in carbon dioxide emissions leads to an increase in mortality and thus reduces economic growth. In addition, carbon dioxide emission decreases foreign direct investment and thus has a negative impact on economic growth. Carbon dioxide emissions also reduces economic growth through a decrease in technological innovation. Therefore, according to the results of this study, carbon dioxide emission leads to a decrease in economic growth through health, foreign direct investment, and technological innovation.
Discussion: According to the results, the following policy recommendations are presented:
• Policymakers should be careful in combating environmental pollution so that their tools and strategies for reducing greenhouse gases emissions do not lead to distortion of production activities and reduced economic growth.
• Policymakers should consider the complexities associated with environmental degradation and its link to economic growth in designing environmental policies.

Keywords

CO2 emissions
Economic Growth
Generalized Method of Moments
Iran economy
Subjects
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Environment and Interdisciplinary Development
Volume 11, Issue 92
Spring 2026
Pages 91-103

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