Informality and the Business Environment as Drivers of Carbon Emissions: The Moderating Role of Environmental Regulatory Quality

A low‐carbon transition cannot succeed while a substantial share of business activity remains beyond the effective reach of regulation. This study examines how informality and the business environment shape carbon emissions and whether regulatory quality conditions the environmental consequences of informal production. The analysis uses an annual panel of 145 economies over 2005–2020, combining data from the World Development Indicators and World Bank. Informality is measured using dynamic general equilibrium and Multiple Indicators Multiple Causes estimates, while nine disaggregated business‐environment dimensions capture firm entry, infrastructure, finance, taxation, trade and commercial institutions. Standard negative binomial regression constitutes the principal estimator, with Poisson regression, alternative informality measurement and income‐group estimations used for robustness. The results show that informality is consistently associated with lower aggregate CO 2 emissions, with the relationship strongest in low‐income economies and weakest in high‐income countries. This apparent environmental advantage reflects the small‐scale, labour‐intensive and capital‐constrained nature of informal production rather than inherently cleaner business practices. Most business‐environment indicators are associated with higher emissions, particularly in lower‐ to middle‐income economies, suggesting that enterprise expansion and energy demand may outpace the diffusion of cleaner technologies. Environmental regulatory quality moderates the negative informality–emissions relationship. The findings show that neither informality, formalisation nor business‐environment reform is intrinsically green. Governments should therefore align formalisation and business reforms with proportionate environmental regulation, green finance, cleaner energy and supply‐chain accountability to reconcile enterprise development with climate objectives.