1. Introduction
With growing social problems such as human diseases, extreme climate events, and natural disasters caused by serious environmental degradation (Kompas et al., 2018; Shahbaz et al., 2019; Coskuner et al., 2020) [
1,
2,
3], it is generally accepted worldwide that protecting the environment is essential for the survival of humans and national sustainable development (Hambira et al., 2020; Huo et al., 2020) [
4,
5]. Following this idea, many scholars have investigated how to achieve better environmental performance, and what factors can affect nature from the perspective of economic activities, technological innovation, international trade, energy efficiency, energy structure, political regimes, and so on (Khan et al., 2019; Mahadevan and Sun, 2020; Wang et al., 2021b) [
6,
7,
8]. Recently, attributed to the outbreak of coronavirus and turbulent international circumstances, economic policy uncertainty (EPU) for every country experienced a quick change (Baker et al., 2020; Jordà et al., 2020; Bakas and Triantafyllou, 2020) [
9,
10,
11]. EPU can not only change the economic activities or the concerns of policymakers (Balcilar et al., 2016; Degiannakis et al., 2018; Hailemariam et al., 2019; Phan et al., 2019) [
12,
13,
14,
15], but can also change firms’ behaviors or decisions toward environmental protection (Guidolin and La Ferrara, 2010; Kang et al., 2017; Olanipekun et al., 2019; Akron et al., 2020) [
16,
17,
18,
19], since economic activity and firms’ production methods contribute to environmental degradation (Salahuddin et al., 2018; Shahbaz et al., 2019) [
2,
20]; thus it is necessary to query whether increasing EPU can affect the environmental performance (Jiang et al., 2019; Yu et al., 2021; Adams et al., 2020) [
21,
22,
23].
EPU may affect environmental performance through the following channels: Jiang et al., (2019) [
21] supported that EPU can change environmental performance directly through policy, as well as indirectly through economic activity. Firstly, once EPU increases, more attention from policymakers would turn to how to maintain economic growth by stimulating economic activity, thus reducing the importance of environmental protection during the implementation of policies. This may bring about bad regulations on environmental damage and less effort to protect the environment (Amin and Dogan, 2021) [
24], as well as a change in the producing decisions of economic entities; the latter is supported by Yu et al. (2021) [
22], who stated that firms often use cheap fossil fuels, which generate more environmental pollution while EPU increases. Secondly, EPU can affect environmental performance by influencing economic demand. As EPU increases, economic activity would experience a decrease, thus reducing the economic demand on energy consumption, which may contribute to the improvement of environmental performance (Wang et al., 2020) [
25].
However, the second channel which supports that EPU may reduce environmental damage does not consider energy efficiency of energy intensity, which is critical to carbon emissions. Thirdly, we prefer to consider that EPU can affect environmental performance by changing energy intensity (Pirgaip & Dincergok, 2020) [
26]. As Al-Thaqeb and Algharabali (2019) [
27] proposed, EPU may cause asymmetric effects, since it is hard to predict future policies; there may be unforeseen effects on investment in clean energy or energy-saving technologies. Bloom (2014) [
28] showed that the investors often choose more conservative policies with the growing of EPU, thus reducing the R&D activities aiming to increase energy efficiency (Atsu and Adams, 2021) [
29]. Based on such channels, EPU causes a rise in energy intensity and motivates corporations to use environmentally ufriendly technologies, which may eventually lead to worse environmental performance. Thirdly, EPU may affect environmental performance by changing the nexus between the energy and the environment. For instance, Ulucak and Khan (2020) [
30] declared that EPU can strengthen the negative effect of energy consumption or energy intensity on carbon emissions; furthermore, Chu and Le (2021) [
31] argued that EPU has a moderating effect on the impact of clean energy or economic complexity on environmental performance.
This scenario naturally motivates us query such interesting issues as the following which need to be studied: Firstly, what effect does EPU exert on total environmental performance? Secondly, can increasing or slowing EPU affect environmental performance under the turbulent international circumstances? Thirdly, can the social circumstances of one country change the effect of EPU on environmental performance? Finally, does EPU’s influence on environmental performance vary among different political regimes? Based on our earlier analyses and their main purposes, we propose such following hypotheses:
Hypothesis 1 (H1). Economic policy uncertainty negatively affects environmental performance.
Hypothesis 2 (H2). Social development and political regimes would change the impact of EPU on environmental performance.
Comparing to previous works of literature, the potential contributions of this work can be seen as follows: Firstly, we carry out an empirical estimation based on multinational panel data for 137 countries; this can be conducted thanks to the World Uncertainty Index for EPU provided by Ahir et al. (2018) [
32], which can offer more common findings on EPU’s influence on environmental performance (Chen et al., 2021) [
33]. In addition, considering the highly frequent external shock and turbulent international environment, we further take the increase of EPU into account, to study whether increasing or slowing uncertainty also changes environmental performance; this approach is novel among existing articles.
In addition, we further explore the question of whether EPU’s influence on environmental performance varies among different fundamental countries from the perspective of social development, such as the stage of economic development, economic performance, globalization, and quality of governance; answering this question can link EPU with social circumstances, as well as understand, in detail, the impact of EPU on environmental performance within specific societies (Shabir et al., 2021) [
34]. Finally, aside from social indicators, we also attach importance to the moderating effect of political regimes from the perspective of democratic or autocratic regimes, as well as left- or right- wing countries; this can offer more exact results for determining the interactive effect of political regimes and EPU in environmental performance.
The rest of this paper is structured in line with previous empirical studies. Specifically,
Section 2 reviews the relevant literature;
Section 3 is mainly about the variables, data and estimation method;
Section 4 offers the main results and discussions; and
Section 5 gives a brief summary of our empirical results and, hence, proposes some suggestions to policymakers.
2. Literature Review
While we review the existing studies, we find that limited works investigate the influence of EPU on total environmental performance, with the most relevant ones focusing on the impact of EPU on carbon emissions. Some studies argue that EPU brings about more CO2 emissions, while other scholars hold that there exists a negative influence of EPU on CO2 emissions.
Vast amounts of literature propose that EPU causes more CO
2 emissions, and some studies propose such an idea according to empirical investigation of one specific country (Ulucak and Khan, 2020; Sohail et al., 2021) [
30,
35]. For instance, Jiang et al. (2019) [
21] utilized data for the United States to empirically investigate the influence of EPU on CO
2 emissions by employing the novel parametric test of Granger causality, and supported that EPU often brings about more CO
2 emissions, regardless of whether the economic growth is higher or lower. The positive effect of EPU on CO
2 emissions in the USA is supported by the research of Wang et al. (2020) [
25]. Similarly, Adedoyin and Zakari (2020) [
36] utilized data for the United Kingdom, which provided a good sample to study uncertainty since it started phasing out of the European Union from 2016, by employing ARDL estimation; the empirical result based on the data from 1985 to 2017 suggested that while EPU reduced carbon emissions in the short run, it would bring about more carbon emissions in the long run. Recently, Yu et al. (2021) [
22] utilized the firm-level data of Chinese firms to examine the influence of EPU on CO
2 emissions, and supported that while the firms experience EPU, their CO
2 emissions would be increased due to the firms preference for utilizing cheap fossil fuels, which may cause more air pollution.
Other scholars confirmed the positive effect of CO
2 emissions according to empirical tests, by using panel data covering multinational countries (Adedoyin and Zakari, 2020; Atsu and Adams, 2021; Amin and Dogan, 2021) [
24,
29,
36]. Adams et al. (2020) [
23] examined the role of EPU on carbon emissions by employing the cross-country data for resource-rich countries during 1996–2017 via the estimation of pooled mean group autoregressive distributed lag model; their result supported that EPU not only positively affected carbon emissions in the short run, but also exerted a significantly positive effect on carbon emissions in the long run. Pirgaip and Dincergok (2020) [
26] investigated the question of whether there exists causality between EPU and carbon emissions, by conducting a panel Granger causality estimation based on the data covering G7 countries from 1998 to 2018; their results confirmed that the relationship between EPU and carbon emissions varies among such countries. There exists a unidirectional causal link from EPU to carbon emission in United States, Germany and Canada, while a bidirectional causal link between carbon emissions and Environmental Performance Index (EPI) was confirmed in Italy. Similarly, Shabir et al. (2021) [
34] examined the impact of EPU on CO
2 emissions by utilizing the data for 24 developed countries and developing countries during 2001–2019; their results supported that EPU does some harm to environmental quality. Aside from the index of EPU developed by Baker et al. (2016) [
37], Adams et al. (2020) [
23] utilized the countries at high geopolitical risk as the sample to study the influence of EPU on CO
2 emissions, by employing the indicator of the World Uncertainty Index (WUI) provided by Ahir et al. (2018) [
32] to capture EPU; their results also supported that higher WUI would lead to more CO
2 emissions. Recently, Atsu and Adams (2021) [
29] also measured EPU by utilizing the WUI index to investigate the effect of EPU on CO
2 emissions, and offered a similar conclusion.
On the contrary, some investigations argued that EPU would negatively affect carbon emissions; for instance, Chen et al. (2021) [
33] conducted a panel estimation with a fixed effect or random effect, based on the data for 15 countries from 1997 to 2019. Their result indicates that there exists a negative influence of EPU on carbon emissions; in other words, EPU tends to be better for environmental performance. Moreover, Doğan and Güler (2021) [
38] empirically studied the relationship between EPU and carbon emissions by employing Parks–Kmenta estimation and panel data for G7 countries from 1997 to 2015; the result suggested that EPU would contribute to a reduction in the carbon emissions. Similarly, Liu and Zhang (2021) [
39] proposed that EPU has a negative effect on CO
2 emissions in the easter region of China, by utilizing the data for China from 2003 to 2017 to empirically examine the relationship between EPU and CO
2 emissions.
Aside from these two ideas, a few scholars support that there exists no significant influence from EPU to carbon emissions. For example, Abbasi and Adedoyin (2020) [
36] examined whether the effects of EPU on carbon emissions are established in China by employing ARDL estimation based on the annual data from 1970 to 2018, and concluded that EPU cannot change the carbon emissions in China, which may be attributed to its sustainable corporate policies. Similarly, Liu and Zhang (2021) [
39] offered a similar idea for the central and western region of China. On the other hand, Adedoyin and Zakari (2020) [
36] proposed that the influence of EPU on CO
2 emissions is not constant short-term and long-term; specifically, while EPU reduces CO
2 emissions initially, it would increase the CO
2 emissions long-term. Similarly, Anser et al., (2021) [
40] investigated the short-term and long-term influences of EPU on carbon emissions, by utilizing the data from 1990 to 2015 for the 10 largest carbon-emitting countries via PMG-ARDL estimation; the empirical results, by employing the indicator of WUI to measure EPU, supported that increasing EPU would mitigate the CO
2 emissions in the short run while it would escalates CO
2 emissions in the long run.
Aside from utilizing the variable of CO
2 emissions to measure the environmental degradation, Anser et al. (2021) [
40] captured environmental performance by ecological footprint, to empirically investigate the role of EPU in environmental performance; they argued that higher EPU would improve the ecological footprint, meaning that EPU benefits environmental performance.
Given the above review of the relevant literature, we can conclude that scant consideration given to the impact of EPU on total environment, since most studies simply captured environmental damage by carbon emissions; Furthermore, the conclusion for the influence of EPU on CO2 emissions is not inconclusive among existing literature, and needs to be further investigated by using data for multinational countries and an appropriate model. In addition, existing literature often utilizes the EPU index to measure EPU, which ignores political uncertainty and has no common base for different countries. Thus, our study tries to bridge the gap between existing studies.
5. Conclusions and Policy Implications
With the growth of economic policy uncertainty (EPU) worldwide and the importance of environmental protection, this study mainly pays attention to the influence of EPU on total environmental performance. To investigate this issue, we collected cross-country data for 137 countries from 2001 to 2018 to carry out system GMM estimation. The baseline result confirms that EPU does some harm to the total environment, which may be attributed to the reduction in activities related to environmental protection caused by EPU; this was also confirmed when we utilized new measurements of EPU or new samples, removing the outliers to conduct robustness tests. Moreover, the increase in EPU would also negatively affect environmental performance. In addition, in examining the moderating effect of other factors in EPU’s influence on environmental performance, we see that the negative effect of EPU on environmental performance among OECD countries is lower than that in non-OECD countries, suggesting that a higher level of economic development would reduce the adverse environmental effect led by EPU. In addition, higher globalization and more international trade would weaken the negative effect of EPU on environmental performance, and better governance would reduce EPU’s influence on environmental performance. Aside from these, we also tested whether the role of EPU in environmental performance varies among different political regimes, the results support that the negative influence of EPU on globalization is stronger in autocracies than in democracies, whereas a left-wing government can somewhat reduce EPU’s influence on environmental performance.
According to our empirical findings, we offer following policy implications for policymakers to improve environmental performance. Firstly, given that EPU would have a negative influence on environmental performance, governments can spare more effort to protect the stability and predictability of economic policies, especially for environmentally friendly policies; if they prefer to conduct new policies, the transition should be smooth, especially during periods of election or when experiencing a big external shock such as coronavirus, the stability of economic policies can not only spur on economic incentive, but also contribute to the improvement of the environmental performance, which are both essential for national sustainable development. Secondly, regarding the specific dimension of EPU, trade uncertainty also negatively affects environmental performance. During the post coronavirus era, the uncertainty of trade also experienced some increase. To reduce the negative effects of trade uncertainty, policymakers should continue their earlier preference of international trade or trade between domestic countries, as well as enact long-term policies to keep sustainable policies for trade activities, which is beneficial for environmental protection.
In addition, the results for moderating effect show that uncertainty’s negative effect on environmental performance is higher among emerging markets. For such countries, they should make more effort to build better and more complete policy systems, which can be learned from OECD countries, to improve their ability to deal with external or internal shock and reduce EPU; Additionally, while they try to improve economic performance, a long-term plan to protect the natural environment should be enacted as well, which is essential to weaken the negative influence of EPU on environmental performance. Moreover, the results of the moderating effect of globalization suggest that a higher level of globalization would reduce the uncertainty’s negative influence on environmental performance. With the growing of protectionism and slowing of globalization, countries should be aware of the importance of globalization in facing uncertainty and environmental concerns. Finally, better governance has the benefits of reducing the negative effect of EPU on environmental performance, brought about by the turbulent international environment and post-novel coronavirus. Countries which prefer to can improve environmental performance by improving the quality of national governance, such as by gaining better control of corruption or protection of property rights, which can help countries to gain better environmental performance.
Due to our limited time, one may further explore the effect of the measures of freedom on environmental quality. One could also consider alternative measures of policy uncertainty and effectiveness, such as the adherence to particular standards, the size of fines against particular infractions, or actual levels of emissions per capita.