Economic Research and Perspectives

Economic Research and Perspectives

Investigating the Effect of Poverty on Environmental Degradation through Institutional Quality, Restrictive Regulations, and Energy Prices in Iranian Provinces Using a Spatial Panel Approach

Authors
Morteza Afghah 1
Yaghoub Andayesh 2
Amin Mansouri 3
azin khoramzadeh 4
1 Associate Professor, Economic Development, Department of Economics, Shahid Chamran University of Ahvaz, Ahvaz, Iran
2 Assistant Professor, Natural Resources, Department of Economics, Shahid Chamran University of Ahvaz, Ahvaz, Iran
3 Associate Professor, Econometrics, Department of Economics, Shahid Chamran University of Ahvaz, Ahvaz, Iran
4 Ph.D Candidate of Economic Development, Department of Economics, Shahid Chamran University of Ahvaz, Ahvaz,Iran
10.48311/ecor.2025.24054
Abstract
The nexus between poverty and environmental degradation, along with the moderating role of institutional variables, constitutes a fundamental challenge for sustainable development. This study aims to spatially analyze the impact of poverty on environmental quality across Iranian provinces over the period 2011–2020. To this end, a “Composite Environmental Degradation Index” was first constructed using Principal Component Analysis (PCA), incorporating six components: water scarcity and pollution, air and soil pollution, deforestation, and climate change. Subsequently, the impact of poverty on this index was estimated using a Spatial Panel Data model, considering the roles of institutional quality, restrictive regulations, and energy prices. The empirical findings indicate that poverty has a positive and significant effect on environmental degradation; implying that an increase in poverty intensifies environmental degradation not only in the source province but also in neighboring provinces through spatial spillover effects. Furthermore, the results revealed that increases in per capita income and improvements in institutional quality have a negative and significant impact on the environmental degradation index—not only in the source province but also in adjacent provinces—signifying an improvement in environmental quality at the regional level. In contrast, energy prices and restrictive regulations exhibited a positive and significant relationship with the environmental degradation index. Consequently, policies focused on poverty alleviation and institutional enhancement in one region will yield positive external benefits for environmental sustainability in neighboring regions, beyond their local impacts.
 
Aim and Introduction:
 
The primary objective of this study is to investigate the influence of poverty on environmental degradation through a set of interrelated channels, including institutional quality, restrictive regulations, and energy prices across Iranian provinces from 2011 to 2020 (1390–1399), using a spatial panel data framework.
Poverty, inequality, and unfair income distribution, along with their associated socio-environmental crises, pose significant challenges to both developed and developing nations. Key consequences of environmental degradation include water scarcity, air and soil pollution, deforestation, biodiversity loss, and climate change driven by global warming.
In this study, a “Composite Environmental Degradation Index” is developed using Principal Component Analysis (PCA) to integrate six critical environmental indicators: water scarcity, water pollution, air pollution, soil pollution, deforestation, and climate change.
 
Methodology:
To capture the multidimensional nature of environmental degradation, this study constructs a composite index via PCA, encompassing the six aforementioned environmental variables. Given the spatial interdependence of environmental outcomes across provinces, spatial econometric techniques are employed. Conventional econometric models are inadequate when observations are geographically dependent. Therefore, the Spatial Panel Data model is utilized to account for spatial lags and spillover effects, allowing for a more accurate assessment of inter-provincial interactions and the distinction between direct (own) and indirect (spillover) effects.
 
Findings:
The empirical results reveal significant spatial interactions. Specifically:
Income: The spillover effects resulting from a 1% sudden change in per capita income in neighboring provinces are greater than the direct effects within the source province. The net outcome contributes to an overall improvement in environmental quality (reduction in degradation).
Poverty: The spillover effects caused by a 1% sudden change in the poverty index in neighboring provinces exceed the direct effects within the source province, operating in the same direction. The overall result is a 0.49% increase in environmental degradation.
Energy Prices: In contrast, a 1% sudden change in energy prices in the source province has stronger environmental spillover effects than similar changes in neighboring provinces. The net result is a 2% increase in environmental degradation.
Institutional Quality: The spillover effects from a 1% sudden change in institutional quality within the source province are more significant than those from neighboring provinces. This results in a 0.35% improvement in environmental quality (reduction in degradation).
Restrictive Regulations: Finally, the spillover effects caused by a 1% sudden change in restrictive environmental regulations within the source province are stronger than those from neighboring provinces. Contrary to theoretical expectations, the outcome is a 0.65% increase in environmental degradation.
 
Discussion and Conclusion:
The results of the spatial econometric models indicate that rising poverty in a region leads to the propagation of environmental degradation through economic, social, and environmental interconnections with neighboring provinces. These findings support the “poverty-environment trap” theory, which highlights a bidirectional reinforcing relationship between poverty and the overexploitation of natural resources.
One of the most significant findings is the negative and statistically significant effect of institutional quality on environmental degradation (i.e., it improves the environment). Provinces with higher institutional quality tend to implement more effective policies, enhance monitoring, ensure law enforcement, and foster transparency, thereby mitigating environmental harm.
Per capita income also exhibits a significant negative impact on environmental degradation. This suggests that higher economic well-being raises public awareness and shifts consumption behaviors toward cleaner technologies, aligning with the Environmental Kuznets Curve (EKC) hypothesis.
Unexpectedly, energy prices and restrictive regulations are positively associated with environmental degradation. The positive link with energy prices suggests inefficiencies in pricing policies, where higher prices might encourage the use of cheaper, more polluting alternatives or illegal consumption. Similarly, the counterintuitive result regarding regulations implies that the mere existence of environmental laws is insufficient. Without effective enforcement mechanisms and quality governance, regulations may be bypassed or poorly implemented, inadvertently failing to curb environmental damage.
In summary, the study concludes that while poverty, energy prices, and ineffective regulations exacerbate environmental degradation locally and regionally, improvements in institutional quality and per capita income act as effective levers for environmental sustainability.
Keywords
Energy Prices
Institutional Quality
Provinces of Iran
Restrictive Regulations

Subjects

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