The Role of Institutional Quality and Governance in Determining the EKC Turning Point: Panel Evidence from Latin America and Caribbean Countries

This study investigates how institutional quality and governance influence the turning point of the Environmental Kuznets Curve (EKC) in Latin America and Caribbean (LAC) countries. The EKC hypothesis suggests an inverted U-shaped relationship between environmental degradation and economic growth, implying that pollution initially increases with income but decreases after a certain income threshold. Using panel data for selected LAC countries over the period 1981–2015, the study employs fixed effects and generalized least squares estimations to assess the impact of governance indicators on carbon emissions. The results reveal that improved institutional quality particularly regulatory quality, rule of law, and control of corruption significantly reduces environmental degradation and lowers the income threshold at which the EKC turning point occurs. The findings imply that strengthening governance structures can accelerate environmental improvement even at lower levels of economic development. Policy implications highlight the need for stronger institutional frameworks, transparent governance, and environmental regulations in the region. This study examines the relationship between economic growth, institutional factors, and environmental degradation within the framework of the Environmental Kuznets Curve (EKC) using panel evidence from Latin America and Caribbean countries. Secondary data covering the period from 1981 to 2015 were obtained from the World Development Indicators for empirical analysis. To ensure the reliability of the time-series properties, the Augmented Dickey–Fuller (ADF) unit root test was applied to examine the stationarity of the variables. The econometric analysis employed the Autoregressive Distributed Lag (ARDL) bounds testing approach to investigate both long-run and short-run relationships among the variables.The empirical findings indicate that per capita income, its squared term, forest area, foreign direct investment (FDI) inflows, population density, urbanization, and trade openness significantly influence carbon dioxide (CO₂) emissions in both the short and long run. The unit root and cointegration results suggest that CO₂ emissions and per capita GDP share a long-run equilibrium relationship, supporting the existence of the EKC hypothesis. The results further reveal that institutional and economic factors play an important role in shaping environmental outcomes, and their effects vary depending on the nature of pollutants and the structural characteristics of LAC economies.