Geopolitical Risk, Resource Development and Environmental Performance in an Energy-Rich Economy: An Augmented ARDL Analysis

Geopolitical risk is an increasingly important source of environmental uncertainty in resource-rich economies, where energy transitions depend on economic activity, energy-system composition, and foreign investment. This study examines these interrelated dynamics using annual data for Azerbaijan over 1996–2024 and an augmented autoregressive distributed lag (A-ARDL) bounds-testing framework. The approach extends conventional ARDL analysis by incorporating the F-independent statistic, enabling robust inference under uncertainty regarding the integration properties of the dependent variable. Linear and nonlinear unit-root tests confirm that all variables are integrated at either level or first difference, with none exhibiting I(2) integration, while a structural break in CO2 emissions is identified in 2009. The A-ARDL bounds test provides strong evidence of a stable long-run relationship among geopolitical risk, economic activity, hydropower generation, foreign direct investment, and environmental performance. Long-run estimates show that geopolitical risk is positively and significantly associated with CO2 emissions in the long run, with a one-standard-deviation increase in geopolitical risk associated with an approximately 8.1% rise in emissions. Conversely, the hydropower share exhibits the strongest negative long-run association with emissions: a one-percentage-point increase in its electricity share reduces emissions by approximately 2.8%, equivalent to an 8.6% reduction at one standard deviation. FDI is weakly negatively associated with emissions whereas economic activity has no significant long-run effect. The error-correction coefficient of −0.896 indicates rapid adjustment, with nearly 90% of disequilibrium corrected within one year. The findings underscore geopolitical exposure as an environmental risk and hydropower as a key resource-based mitigation channel for sustainable energy transitions.