Energy Subsidies and Environmental Quality: Evidence from Low- and Middle-Income Countries

Abstract

Applying the least square dummy variable corrected (LSDVC) method, this study examines the impact of energy subsidies on the environmental quality of 70 low- and middle-income countries over the 2010–2019 period. The results indicate a positive impact of energy subsidies on environmental degradation. Also, the estimated results suggest a significant negative relationship between energy subsidies and environmental degradation in low-income countries after decomposing the countries into income categories (low income, lower middle income, and upper middle income). In addition, the results validate the existence of the Environmental Kuznets Curve hypothesis in the full panel. Similarly, while environmental pollution increases in the upper-middle-income and lower-middle-income countries as foreign direct investment (FDI) increases, the low-income countries show a positive effect of FDI on environmental quality, which indicates that pollution levels in these countries decrease as the net inflow of FDI increases. On the other hand, the result suggests that population density generally increases environmental pollution. These findings provide information and a clear understanding of the influence of energy subsidies on environmental quality and call on regulators and policymakers to carefully review energy subsidy policies.