Role of financial regulations and climate policy uncertainty in reducing CO₂ emissions—an application of bootstrap subsample rolling-window Granger causality

The study investigates the impact of financial regulation, climate policy uncertainty, renewable energy, and natural gas on CO₂ emissions in the USA. Utilizing monthly time series data spanning from 1988:M11 to 2022:M12, we employed a full-sample bootstrap non-Granger causality test. The results indicate a bidirectional causality between renewable energy, natural gas, and climate policy uncertainty with CO₂. Additionally, there is a unidirectional causality from financial regulation to CO₂. Tests assessing the constancy of parameters in the estimated vector autoregressive models reveal short- and long-run instability. This underlines the inadequacy of relying solely on full-sample causality tests, necessitating a time-varying (bootstrap) rolling-window approach to scrutinize the causal interrelationship between the variables. Employing bootstrap subsample rolling-window Granger causality, our findings confirm bidirectional causality among all proposed variables, albeit varying over the sample period. These results provide policymakers with valuable insights, emphasizing the importance of consistent and transparent financial regulations aligned with a long-term goal of sustainability.