Abstract
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.
Similar content being viewed by others
Availability of data and materials
The datasets analyzed during the study are available in the website of IMF database, World Development Indicators (WDI), and International Energy Statistics (IEA).
Notes
See Svirydzenka (2016) for more detail regarding these indices.
References
Abbasi F, Riaz K (2016) CO2 emissions and financial development in an emerging economy: an augmented VAR approach. Energy Policy 90:102–114
Abid M (2017) Does economic, financial and institutional developments matter for environmental quality? A comparative analysis of EU and MEA countries. J Environ Manage 188:183–194
Acheampong AO (2019) Modelling for insight: does financial development improve environmental quality? Energy Econ 83:156–179
Acheampong AO, Amponsah M, Boateng E (2020) Does financial development mitigate carbon emissions? Evidence from heterogeneous financial economies. Energy Econ 88:104768
Adom PK, Amuakwa-Mensah F, Amuakwa-Mensah S (2020) Degree of financialization and energy efficiency in Sub-Saharan Africa: do institutions matter? Financial Innov 6(1):1–22
Ahmad M, Jabeen G, Hayat MK, Khan REA, Qamar S (2020) Revealing heterogeneous causal links among financial development, construction industry, energy use, and environmental quality across development levels. Environ Sci Pollut Res 27(5):4976–4996
Aizenman J, Jinjarak Y, Park D (2015) Financial development and output growth in developing Asia and Latin America: a comparative sectoral analysis (No. w20917). National Bureau of Economic Research
Al Mamun M, Sohag K, Shahbaz M, Hammoudeh S (2018) Financial markets, innovations and cleaner energy production in OECD countries. Energy Econ 72:236–254
Ali HS, Law SH, Lin WL, Yusop Z, Chin L, Bare UAA (2019) Financial development and carbon dioxide emissions in Nigeria: evidence from the ARDL bounds approach. Geo Journal 84(3):641–655
Allen F, Carletti E, Cull R, Qian J, Senbet L, Valenzuela P (2013) Resolving the African financial development gap: cross-country comparisons and a within-country study of Kenya. The World Bank
Al-Mulali U, Ozturk I (2016) The investigation of environmental Kuznets curve hypothesis in the advanced economies: the role of energy prices. Renew Sus Energ Rev 54:1622–1631
Al-Mulali U, Ozturk I, Lean HH (2015a) The influence of economic growth, urbanization, trade openness, financial development, and renewable energy on pollution in Europe. Nat Hazards 79(1):621–644
Al-Mulali U, Tang CF, Ozturk I (2015b) Does financial development reduce environmental degradation? Evidence from a panel study of 129 countries. Environ Sci Pollut Res 22(19):14891–14900
Anser MK, Shabbir MS, Tabash MI, Shah SHA, Ahmad M, Peng MYP, Lopez LB (2021b) Do renewable energy sources improve clean environmental-economic growth? Empirical investigation from South Asian economies. Energy Explor & Exploit 01445987211002278
Anser MK, Usman M, Godil DI, Shabbir MS, Tabash MI, Ahmad M, Lopez LB (2021a) Does air pollution affect clean production of sustainable environmental agenda through low carbon energy financing? Evidence from ASEAN countries. Energy & Environ 0958305X211007854
Anton SG, Nucu AEA (2020) The effect of financial development on renewable energy consumption. A Panel Data Approach Renew Energy 147:330–338
Anwar A, Siddique M, Dogan E, Sharif A (2021b) The moderating role of renewable and non-renewable energy in environment-income nexus for ASEAN countries: evidence from method of moments quantile regression. Renew Energy 164:956–967
Anwar A, Chaudhary AR, Malik S, Bassim M (2021a) Modelling the macroeconomic determinants of carbon dioxide emissions in the G-7 countries: the roles of technological innovation and institutional quality improvement. Glob Bus Rev 09721509211039392.
Anwar A, Sinha A, Sharif A, Siddique M, Irshad S, Anwar W, Malik S (2021b) The nexus between urbanization, renewable energy consumption, financial development, and CO2 emissions: evidence from selected Asian countries. Environ Dev and Sustain 1–21
Apergis N, Payne JE (2015) Renewable energy, output, carbon dioxide emissions, and oil prices: evidence from South America. Energy Sources Part B 10(3):281–287
Apergis N, Payne JE, Menyah K, Wolde-Rufael Y (2010) On the causal dynamics between emissions, nuclear energy, renewable energy, and economic growth. Ecol Econ 69(11):2255–2260
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297
Bhat JA (2018) Renewable and non-renewable energy consumption—impact on economic growth and CO 2 emissions in five emerging market economies. Environ Sci Pollut Res 25(35):35515–35530
Bhattacharya M, Churchill SA, Paramati SR (2017) The dynamic impact of renewable energy and institutions on economic output and CO2 emissions across regions. Renew Energy 111:157–167
Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87(1):115–143
Bölük G, Mert M (2014) Fossil & renewable energy consumption, GHGs (greenhouse gases) and economic growth: evidence from a panel of EU (European Union) countries. Energy 74:439–446
Bölük G, Mert M (2015) The renewable energy, growth and environmental Kuznets curve in Turkey: an ARDL approach. Renew Sus Energ Rev 52:587–595
Boutabba MA (2014) The impact of financial development, income, energy and trade on carbon emissions: evidence from the Indian economy. Econ Model 40:33–41
Chandio AA, Akram W, Ozturk I, Ahmad M, Ahmad F (2021) Towards long-term sustainable environment: does agriculture and renewable energy consumption matter?. Environ Sci Pollut Res 1–20
Chang SC (2015) Effects of financial developments and income on energy consumption. Int Rev Econ Finance 35:28–44
Charfeddine L, Khediri KB (2016) Financial development and environmental quality in UAE: cointegration with structural breaks. Renew Sus Energ Rev 55:1322–1335
Chen Z, Huang W, Zheng X (2019) The decline in energy intensity: does financial development matter? Energy Policy 134:110945
Čihák M, Demirgüç-Kunt A, Feyen E, Levine R (2012) Benchmarking financial development around the world. World Bank policy research working paper 6175:1–54
Claessens S, Feijen E (2007) Financial sector development and the millennium development goals. The World Bank
Claessens S, Feijen E (2007) Financial sector development and the millennium development goals (No. 89). World Bank Publications
Çoban S, Topcu M (2013) The nexus between financial development and energy consumption in the EU: a dynamic panel data analysis. Energy Econ 39:81–88
Dogan E, Turkekul B (2016) CO2 emissions, real output, energy consumption, trade, urbanization and financial development: testing the EKC hypothesis for the USA. Environ Sci Pollut Res 23(2):1203–1213
Dong K, Hochman G, Zhang Y, Sun R, Li H, Liao H (2018) CO2 emissions, economic and population growth, and renewable energy: empirical evidence across regions. Energy Econ 75:180–192
Farhani S, Shahbaz M (2014) What role of renewable and non-renewable electricity consumption and output is needed to initially mitigate CO2 emissions in MENA region? Renew Sus Energ Rev 40:80–90
Fodha M, Zaghdoud O (2010) Economic growth and pollutant emissions in Tunisia: an empirical analysis of the environmental Kuznets curve. Energy Policy 38(2):1150–1156
Gill AR, Hassan S, Haseeb M (2019) Moderating role of financial development in environmental Kuznets: a case study of Malaysia. Environ Sci Pollut Res 26(33):34468–34478
Gokmenoglu KK, Sadeghieh M (2019) Financial development, CO2 emissions, fossil fuel consumption and economic growth: the case of Turkey. Strategic Planning for Energy and the Environment 38(4):7–28
Habiba U, Xinbang C, Ahmad RI (2021) The influence of stock market and financial institution development on carbon emissions with the importance of renewable energy consumption and foreign direct investment in G20 countries. Environ Sci Pollut Res 1–12
Hao Y, Zhang ZY, Liao H, Wei YM, Wang S (2016) Is CO 2 emission a side effect of financial development? An empirical analysis for China. Environ Sci Pollut Res 23(20):21041–21057
Jamel L, Maktouf S (2017) The nexus between economic growth, financial development, trade openness, and CO2 emissions in European countries. Cogent Econ Finance 5(1):1341456
Kahia M, Jebli MB, Belloumi M (2019) Analysis of the impact of renewable energy consumption and economic growth on carbon dioxide emissions in 12 MENA countries. Clean Technol Environ Policy 21(4):871–885
Kahouli B (2017) The short and long run causality relationship among economic growth, energy consumption and financial development: evidence from South Mediterranean countries (SMCs). Energy Econ 68:19–30
Kakar ZK (2016) Financial development and energy consumption: evidence from Pakistan and Malaysia. Energy Sources Part B 11(9):868–873
Kasman A, Duman YS (2015) CO2 emissions, economic growth, energy consumption, trade and urbanization in new EU member and candidate countries: a panel data analysis. Econ Model 44:97–103
Kayani GM, Ashfaq S, Siddique A (2020) Assessment of financial development on environmental effect: implications for sustainable development. J Clean Prod 261:120984
Khan MTI, Ali Q, Ashfaq M (2018) The nexus between greenhouse gas emission, electricity production, renewable energy and agriculture in Pakistan. Renew Energy 118:437–451
Lahiani A, Mefteh-Wali S, Shahbaz M, Vo XV (2021) Does financial development influence renewable energy consumption to achieve carbon neutrality in the USA? Energy Policy 158:112524
Le TH, Le HC, Taghizadeh-Hesary F (2020) Does financial inclusion impact CO2 emissions? Evidence from Asia. Finance Res Lett 34:101451
Lee CT, Lim JS, Van Fan Y, Liu X, Fujiwara T, Klemeš JJ (2018) Enabling low-carbon emissions for sustainable development in Asia and beyond. J Clean Prod 176:726–735
Liu X, Zhang S, Bae J (2017) The nexus of renewable energy-agriculture-environment in BRICS. Appl Energy 204:489–496
Mahalik MK, Mallick H (2014) Energy consumption, economic growth and financial development: exploring the empirical linkages for India. The Journal of Developing Areas 139–159
Maji IK, Habibullah MS, Saari MY (2017) Financial development and sectoral CO 2 emissions in Malaysia. Environ Sci Pollut Res 24(8):7160–7176
Narayan PK, Saboori B, Soleymani A (2016) Economic growth and carbon emissions. Econ Model 53:388–397
Omri A, Daly S, Rault C, Chaibi A (2015) Financial development, environmental quality, trade and economic growth: what causes what in MENA countries. Energy Econ 48:242–252
Pan X, Uddin MK, Han C, Pan X (2019) Dynamics of financial development, trade openness, technological innovation and energy intensity: evidence from Bangladesh. Energy 171:456–464
Pao HT, Chen CC (2019) Decoupling strategies: CO2 emissions, energy resources, and economic growth in the Group of Twenty. J Clean Prod 206:907–919
Paramati SR, Mo D, Gupta R (2017) The effects of stock market growth and renewable energy use on CO2 emissions: evidence from G20 countries. Energy Econ 66:360–371
Paramati SR, Alam MS, Apergis N (2018) The role of stock markets on environmental degradation: a comparative study of developed and emerging market economies across the globe. Emerg Mark Rev 35:19–30
Poumanyvong P, Kaneko S (2010) Does urbanization lead to less energy use and lower CO2 emissions? A Cross-Country Analysis Ecol Econ 70(2):434–444
Rafiq S, Bloch H, Salim R (2014) Determinants of renewable energy adoption in China and India: a comparative analysis. Appl Econ 46(22):2700–2710
Rehman A, Ma H, Ahmad M, Ozturk I, Işık C (2021) An asymmetrical analysis to explore the dynamic impacts of CO2 emission to renewable energy, expenditures, foreign direct investment, and trade in Pakistan. Environ Sci Pollut Res 1–13
Sadorsky P (2010) The impact of financial development on energy consumption in emerging economies. Energy Policy 38(5):2528–2535
Sadorsky P (2011) Financial development and energy consumption in Central and Eastern European frontier economies. Energy Policy 39(2):999–1006
Sadorsky P (2013) Do urbanization and industrialization affect energy intensity in developing countries? Energy Econ 37:52–59
Serdeczny O, Adams S, Baarsch F, Coumou D, Robinson A, Hare W, Reinhardt J (2017) Climate change impacts in Sub-Saharan Africa: from physical changes to their social repercussions. Reg Environ Change 17(6):1585–1600
Shahbaz M, Lean HH (2012) Does financial development increase energy consumption? The role of industrialization and urbanization in Tunisia. Energy Policy 40:473–479
Shahbaz M, Solarin SA, Mahmood H, Arouri M (2013) Does financial development reduce CO2 emissions in Malaysian economy? A time series analysis. Econ Model 35:145–152
Shahbaz M, Shahzad SJH, Ahmad N, Alam S (2016) Financial development and environmental quality: the way forward. Energy Policy 98:353–364
Shahbaz M, Nasir MA, Roubaud D (2018) Environmental degradation in France: the effects of FDI, financial development, and energy innovations. Energy Econ 74:843–857
Shahbaz M, Haouas I, Van Hoang TH (2019) Economic growth and environmental degradation in Vietnam: is the environmental Kuznets curve a complete picture? Emerg Mark Rev 38:197–218
Sinha A, Shahbaz M (2018) Estimation of environmental Kuznets curve for CO2 emission: role of renewable energy generation in India. Renew Energy 119:703–711
Svirydzenk K (2016) Introducing a new broad-based index of financial development.
Tamazian A, Rao BB (2010) Do economic, financial and institutional developments matter for environmental degradation? Evidence from Transitional Economies Energy Econ 32(1):137–145
Tamazian A, Chousa JP, Vadlamannati KC (2009) Does higher economic and financial development lead to environmental degradation: evidence from BRIC countries. Energy Policy 37(1):46–253
Tan Z, Koondhar MA, Nawaz K, Malik MN, Khan ZA, Koondhar MA (2021) Foreign direct investment, financial development, energy consumption, and air quality: a way for carbon neutrality in China. J Environ Manage 299:113572
Yao X, Tang X (2020) Does financial structure affect CO2 emissions? Evidence from G20 countries. Finance Res Lett 101791
Zafar MW, Zaidi SAH, Sinha A, Gedikli A, Hou F (2019) The role of stock market and banking sector development, and renewable energy consumption in carbon emissions: insights from G-7 and N-11 countries. Resour Policy 62:427–436
Zaidi SAH, Zafar MW, Shahbaz M, Hou F (2019) Dynamic linkages between globalization, financial development and carbon emissions: evidence from Asia Pacific Economic Cooperation countries. J Clean Prod 228:533–543
Zeqiraj V, Sohag K, Soytas U (2020) Stock market development and low-carbon economy: the role of innovation and renewable energy. Energy Econ 91:104908
Zhang YJ (2011) The impact of financial development on carbon emissions: an empirical analysis in China. Energy Policy 39(4):2197–2203
Zhang B, Wang B, Wang Z (2017) Role of renewable energy and non-renewable energy consumption on EKC: evidence from Pakistan. J Clean Prod 156:855–864
Zhu Q, Peng X (2012) The impacts of population change on carbon emissions in China during 1978–2008. Environ Impact Assess Rev 36:1–8
Author information
Authors and Affiliations
Contributions
Umme Habiba, conception, writing, and analysis, and Cao Xinbang, data collection, methodology, and writing. Both authors read and approved the final manuscript.
Corresponding author
Ethics declarations
Ethics approval and consent to participate
Not applicable.
Consent for publication
Not applicable.
Competing interests
The authors declare no competing interests.
Additional information
Responsible Editor: Ilhan Ozturk
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Habiba, U., Xinbang, C. The impact of financial development on CO2 emissions: new evidence from developed and emerging countries. Environ Sci Pollut Res 29, 31453–31466 (2022). https://doi.org/10.1007/s11356-022-18533-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11356-022-18533-3