The impact of financial development on CO2 emissions: new evidence from developed and emerging countries

Habiba, Umme; Xinbang, Cao

The impact of financial development on CO2 emissions: new evidence from developed and emerging countries

2022

Habiba, Umme | Xinbang, Cao

Taking into account the complicated and multidimensional nature of financial development, this study aims to investigate the impact of overall financial market development, institution development, and their sub-indices on CO₂ emissions. To advance knowledge about the nexus between financial development and CO₂ emissions, four financial market indices (overall financial market development, FM-access, FM-depth, and FM-efficiency) and four financial institution indices (overall financial institution development, FI-access, FI-depth, and FI-efficiency) are used. The study used two-stage system GMM and panel data of developed and emerging countries over the period 2000–2018. The empirical results reveal that the overall financial market development and its sub-indices (FM-access, FM-depth, and FM-efficiency) reduce CO₂ emissions in developed and emerging countries. The results further show that the overall financial institution development and its sub-indices such as FI-access, FI-depth, and FI-efficiency foster the environment quality in developed economies, while these indices impede the environmental quality in emerging economies. The usage of renewable energy is found to be a viable solution to mitigate the CO₂ emissions in both groups of countries. Additionally, policies related to sustainable development are also discussed in the paper.

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