Kizito Uyi Ehigiamusoe, Chien‐Chiang Lee
ABSTRACT The high level of economic activities in high‐income countries (HICs) has been accompanied by severe carbon dioxide (CO 2 ) emissions that threaten environmental sustainability. Though institutional quality is expected to decouple CO 2 emissions from economic activities, its direct and moderating roles have not received thorough empirical analysis. This study fills these research gaps. The objective is to assess the direct effects of economic activities and institutional quality on CO 2 emissions in HICs. It further analyzes the environmental effects of the components of economic activities (agricultural, industrial, service) and the indicators of institutional quality (political stability, rule of law, control of corruption, regulatory quality, government effectiveness, voice accountability). Besides, this study unveils the moderating roles of institutional quality and its indicators on the environmental impact of economic activities. It applies the Fully Modified Ordinary Least Squares, system Generalized Method of Moments, and Dumitrescu‐Hurlin Granger non‐causality methods to address issues of heterogeneity, endogeneity, and cross‐sectional dependence. The results of the baseline model indicate that economic activities contribute to CO 2 emissions in HICs. Further analysis reveals that industrial activities aggravate CO 2 emissions while agricultural and service activities mitigate CO 2 emissions. The interaction model signifies that institutional quality and its indicators mitigate the harmful environmental impact of economic activities in HICs. The implication of this study is that improvements in institutional quality will enable HICs to sustain economic activities without compromising CO 2 emissions, thereby achieving carbon neutrality and Sustainable Development Goal 13.