Ecological effects of income inequality, financial development, and natural resources in E7 Countries

Among the necessities of identifying its underlying causes of environmental degradation, critical socioeconomic factors have often been overlooked in empirical studies. This study investigates the impact of income inequality, financial development, and natural resources on environmental degradation in the E7 economies over the period 1992–2021. Environmental degradation is measured through the load capacity factor, which captures the balance between ecological footprint and biocapacity. By using the Cross-Sectionally Augmented Autoregressive Distributed Lag model, the findings reveal that higher income inequality increases environmental quality, with a long-run coefficient of approximately 0.53, while financial development also exerts a positive but smaller impact (0.17). By contrast, economic growth (−0.27) and energy consumption (−0.54) are found to increase degradation in the long-run, suggesting that structural shifts in energy use and growth dynamics may improve ecological balance. Natural resources and trade openness, however, have not statistically significant long-run effects. Short-run estimates are broadly consistent with these results. Robustness checks based on the Common Correlated Effects Mean Group and Augmented Mean Group estimators confirm the reliability of the findings. The study contributes novel evidence that income inequality, financial development, and natural resources jointly shape environmental outcomes in E7 countries and offers policy insights on inequality, fostering green finance, and promoting renewable energy to achieve sustainable development.