Green Sukuk and Low-Carbon Transition: An Econometric Analysis of Environmental Policy and Islamic Finance Development

Abstract

This research examines the influence of the Environmental Policy Index, Green Sukuk Issuance, Islamic Finance Development Index, and the Muslim majority dummy (MSLM) on carbon emission reduction across countries. Data for this research were collected from reputable and internationally recognized databases, including Climate Watch, the World Bank, the Refinitiv Islamic Finance Development Report, and the Yale Environmental Performance Index. The empirical results demonstrate that the Environmental Policy Index, Green Sukuk Issuance, and Islamic Finance Development Index have significant and positive effects on carbon emission reduction across countries. These findings suggest that nations with stronger environmental governance and more advanced Islamic financial systems are more effective in achieving emission mitigation targets. Conversely, the Muslim-majority dummy variable shows a significant negative relationship with carbon emission reduction, implying that Muslim-majority countries, despite their potential in Islamic finance, may face structural or policy-related challenges in translating financial mechanisms into effective environmental outcomes. Policymakers should reinforce the implementation of environmental regulations, promote broader issuance of Green Sukuk, and strengthen the institutional infrastructure of Islamic finance to enhance the allocation of sustainable investments. Moreover, the negative effect of the Muslim-majority dummy suggests that socio-religious characteristics alone are insufficient to achieve emission reduction objectives. Institutional strength, regulatory consistency, and environmental policy enforcement remain the critical determinants of success in achieving carbon mitigation.