The joint impact of regulatory quality and policy stringency on greenhouse gas emissions in middle income and high income countries

This study investigates the impact of environmental regulation on greenhouse gas (GHG) and CO2 emissions per capita. A composite index is developed to integrate environmental policy stringency (EPS) with regulatory quality, utilizing data from the OECD and the World Bank’s Worldwide Governance Indicators. The analysis covers a panel of 40 countries (32 high-income and 8 middle-income) for the period 1996–2020. To account for distributional heterogeneity, potential endogeneity concerns and cross-sectional dependence, the study employs a multi-method framework comprising Dumitrescu-Hurlin panel causality tests, Pesaran cross-sectional dependence tests, and panel quantile regressions based on the approaches of Canay [9] and Machado and Santos Silva [39]. The results indicate that the interaction between regulatory quality and environmental policy stringency is associated with lower GHG and CO2 emissions, although the magnitude and significance of the effect vary across the conditional distribution of emissions and across country groups. For the full sample and high-income countries, the interaction term exhibits a negative and statistically significant relationship with emissions, with stronger effects generally observed at the median and upper quantiles. By contrast, no significant relationship is found for middle-income countries, suggesting that stricter environmental policies may require stronger institutional capacity and enforcement mechanisms to translate into measurable environmental outcomes. The findings are robust across alternative quantile estimators and lagged specifications. Overall, the evidence highlights the importance of combining stringent environmental policies with high-quality regulatory institutions to enhance environmental performance and achieve emission reduction goals.