Abstract
This paper examines the dynamic relationship between electricity consumption (ELE), foreign direct investment (FDI), and carbon dioxide (CO2) emissions in 88 developing countries from 1985 to 2024. While electricity demand is widely recognized as a primary driver of CO2 emissions, the moderating role of FDI remains contested, oscillating between the “Pollution Haven” and “Pollution Halo” hypotheses. Employing the Difference Generalized Method of Moments estimation and Granger causality tests, this study provides empirical evidence of three critical patterns. First, electricity consumption exerts a significantly positive effect on CO2 emissions, reflecting the persistent reliance on fossil fuels in the energy mix. Second, FDI mitigates CO2 emissions, consistent with the “Pollution Halo” hypothesis. Third, the positive moderating effect of FDI in the ELE-CO2 nexus shows an interesting inference. The FDI targets energy-intensive sectors, creates scale effects to offset efficiency gains (mitigating CO2 emissions), and leads to expanding CO2 emissions. These results highlight integrated policy design. Decarbonizing electricity systems and strategically regulating FDI toward low-carbon sectors offer developing countries a coherent pathway to establish economic sustainability.