Determinants of environmental sustainability in the United States: analyzing the role of financial development and stock market capitalization using LCC framework

Abstract

This research investigates how the USA's load capacity factor (LCF) has been impacted by trade openness, financial development, stock market capitalization, and industrialization over the period 1990–2022. This study also tests the “Load Capacity Curve (LCC)” hypothesis. Various unit root tests were conducted to determine the stationarity of the dataset, revealing that the variables are free from unit root problems and exhibit mixed orders of integration. The “Autoregressive Distributed Lag (ARDL)” bounds test confirmed co-integration among the variables. The results from the ARDL model validated the existence of the LCC hypothesis in the USA. The findings also demonstrated that industrialization is positively correlated with LCF, whereas financial development, stock market capitalization, and trade openness are negatively correlated with LCF. To ensure the robustness of the ARDL estimations, the study also employed several regressions, all of which confirmed the validity of the ARDL results. Additionally, pairwise Granger causality tests revealed unidirectional causal relationships between GDP and LCF, stock market capitalization and LCF, and industrialization and LCF, while no causal relationships were found between financial development and LCF and trade openness and LCF. The findings advocate that the USA should advance eco-friendly industrial practices to ensure environmental sustainability, alongside regulated financial markets and institutions that mandate the utilization of green investments.