Financial development and environment: Evidence of consumption-based CO₂ emissions

Document Type : Original Research

Authors
1 Ferdowsi university of Mashhad
2 Associate Professor
3 2. PhD candidate in Economics
Abstract
Today, financial development is one of the main drivers of economic growth and development. Since developing countries are focused on the rapid expansion of economic growth, they have taken steps toward the development of financial markets. However, the consequences of financial development on environmental quality are not clear. In addition, since the emission of carbon dioxide caused by production is significantly different from the emission of carbon dioxide caused by consumption in some countries (such as China). Therefore, this article examines the impact of financial development on the consumption-based CO emissions for a panel of 17 developing countries during the period of 1990-2019 with a Panel- Quantile approach. Empirical findings show that the effect of financial development on consumption-based CO emissions is positive and significant in all quantiles. In addition, this study considers gross domestic product, rental rates of natural resources, trade openness, and globalization as control variables. The results of this study provide new evidence for policymakers to maintain environmental quality by focusing on the link between financial development and consumption-based CO emissions.

Keywords

Subjects


Abbasi, F., & Riaz, K. (2016). CO2 emissions and financial development in an emerging economy: an augmented VAR approach. Energy Policy, 90, 102-114.‌ https://doi.org/10.1016/j.enpol.2015.12.017
Abdouli, M., & Hammami, S. (2020). Economic growth, environment, fdi inflows, and financial development in Middle East countries: Fresh evidence from simultaneous equation models. Journal of the Knowledge Economy, 11(2), 479-511.‌
Acheampong, A. O. (2019). Modelling for insight: does financial development improve environmental quality?. Energy Economics, 83, 156-179.‌ https://doi.org/10.1016/j.eneco.2019.06.025
Acheampong, A. O., Amponsah, M., & Boateng, E. (2020). Does financial development mitigate carbon emissions? Evidence from heterogeneous financial economies. Energy Economics, 88, 104768.‌ https://doi.org/10.1016/j.eneco.2020.104768
Ahmed K., Shahbaz M., Kyophilavong P. (2016). Revisiting the emissions-energy-trade nexus: evidence from the newly industrializing countries. Environmental Science and Pollution Research, 23(8): 7676-7691. DOI 7610.1007/s11356-11015-16018-x
Albulescu C., Tiwari A.K., Yoon S.M., Kang S.H. (2019). FDI, income, and environmental pollution in Latin America: Replication and extension using panel quantiles regression analysis. Energy Econ, 84:104504. https://doi.org/10.1016/j.eneco.2019.104504
Ali S., Yusop Z., Kaliappan SR., Chin L. (2020). Dynamic common correlated effects of trade openness, FDI, and institutional performance on environmental quality: evidence from OIC countries. Environmental Science and Pollution Research, 1-12. https://doi.org/10.1007/s11356-11020-07768-11357.
Al-Mulali U., Ozturk I. (2016). The investigation of environmental Kuznets curve hypothesis in the advanced economies: the role of energy prices. Renewable and Sustainable Energy Reviews, 54:1622-1631. https://doi.org/1610.1016/j.rser.2015.1610.1131.
Al-Mulali U., Solarin SA., Sheau-Ting L., Ozturk I. (2016). Does moving towards renewable energy cause water and land inefficiency? An empirical investigation. Energy Policy, 93:303-314. https://doi.org/310.1016/j.enpol.2016.1003.1023.
Azimi, M. N., Rahman, M. M., & Nghiem, S. (2023). Linking governance with environmental quality: a global perspective. Scientific Reports, 13(1), 15086.‌ https://www.nature.com/articles/s41598-023-42221-y
Bekhet, H. A., Matar, A., & Yasmin, T. (2017). CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models. Renewable and sustainable energy reviews, 70, 117-132.‌ https://doi.org/10.1016/j.rser.2016.11.089
Belsley DA., Kuh E., Welsch RE. (2005). Regression diagnostics: Identifying influential data and sources of collinearity. John Wiley & Sons, 571. http://dx.doi.org/10.1002/0471725153.
Breusch TS., Pagan AR. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The review of economic studies, 47(1): 239-253. https://doi.org/210.2307/2297111.
Buhari DO., Lorente DB., Ali-Nasir M. (2020). European commitment to COP21 and the role of energy consumption, FDI, trade and economic complexity in sustaining economic growth. Journal of Environmental Management, 273. DOI: 10.1016/j.jenvman.2020.111146.
Dogan, E., & Seker, F. (2016). The influence of real output, renewable and non-renewable energy, trade and financial development on carbon emissions in the top renewable energy countries. Renewable and Sustainable Energy Reviews, 60, 1074-1085.‌ https://doi.org/10.1016/j.rser.2016.02.006
Gómez M., Rodríguez JC. (2020). The Ecological Footprint and Kuznets Environmental Curve in the USMCA Countries: A Method of Moments Quantile Regression Analysis. Moments Quantile Regression Analysis Energies, 13(24):6650. https://doi.org/10.3390/en13246650.
Hassan ST., Baloch MA., Mahmood N., Zhang J. (2019). Linking economic growth and ecological footprint through human capital and biocapacity. Sustainable Cities and Society, 47:101516. https://doi.org/101510.101016/j.scs.102019.101516.
https://ourworldindata.org/co2-emissions
Kao C. (1999). Spurious regression and residual-based tests for cointegration in panel data. Journal of Econometrics, 90(1):1-44. https://doi.org/10.1016/S0304-4076(1098)00023-00022.
Khan, Z., Ali, S., Dong, K., & Li, R. Y. M. (2021). How does fiscal decentralization affect CO2 emissions? The roles of institutions and human capital. Energy Economics, 94, 105060.‌ https://doi.org/10.1016/j.eneco.2020.105060
Koengkan, M., Santiago, R., Fuinhas, J. A., & Marques, A. C. (2019). Does financial openness cause the intensification of environmental degradation? New evidence from Latin American and Caribbean countries. Environmental Economics and Policy Studies, 21, 507-532.‌
Koenker R. (2004). Quantile regression for longitudinal data. J. Multivar. Anal, 91:74–89. https://doi.org/10.1016/j.jmva.2004.05.006.
Koenker R., Xiao Z. (2002) Inference on the quantile regression process. Econometrica, 70(4):1583-1612. https://doi.org/1510.1111/1468-0262.00342.
Koshta, N., Bashir, H. A., & Samad, T. A. (2021). Foreign trade, financial development, agriculture, energy consumption and CO2 emission: testing EKC among emerging economies. Indian Growth and Development Review, 14(1), 50-80.‌ https://doi.org/10.1108/IGDR-10-2019-0117
Li, S., Tauni, M. Z., Afshan, S., Dong, X., & Abbas, S. (2024). Moving towards a sustainable environment in the BRICS Economies: What are the effects of financial development, renewable energy and natural resources within the LCC hypothesis?. Resources Policy, 88, 104457.‌https://doi.org/10.1016/j.resourpol.2023.104457
Ling, G., Razzaq, A., Guo, Y., Fatima, T., & Shahzad, F. (2022). Asymmetric and time-varying linkages between carbon emissions, globalization, natural resources and financial development in China. Environment, Development and Sustainability, 24(5), 6702-6730.‌
Mu, R. (2018). Bounded rationality in the developmental trajectory of environmental target policy in China, 1972–2016. Sustainability, 10(1), 199. https://doi.org/10.3390/su10010199
Nasir, M. A., Huynh, T. L. D., & Tram, H. T. X. (2019). Role of financial development, economic growth & foreign direct investment in driving climate change: A case of emerging ASEAN. Journal of environmental management, 242, 131-141.‌ https://doi.org/10.1016/j.jenvman.2019.03.112
Nuţă, F. M., Sharafat, A., Abban, O. J., Khan, I., Irfan, M., Nuţă, A. C., ... & Asghar, M. (2024). The relationship among urbanization, economic growth, renewable energy consumption, and environmental degradation: A comparative view of European and Asian emerging economies. Gondwana Research, 128, 325-339.‌ https://doi.org/10.1016/j.gr.2023.10.023
Osmani, F., Homayounifar, M., & Javad Gorjipour, M. (2022). Do export quality, urbanization and fertility rate affect the ecological footprint?: case study: a panel of developing countries. Do export quality, urbanization and fertility rate affect the ecological footprint?: case study: a panel of developing countries, 51-67.‌ https://www.torrossa.com/it/resources/an/5375298
Park, Y., Meng, F., & Baloch, M. A. (2018). The effect of ICT, financial development, growth, and trade openness on CO 2 emissions: an empirical analysis. Environmental Science and Pollution Research, 25, 30708-30719.‌
Pata, U.K. (2020). Renewable and non-renewable energy consumption, economic complexity, CO2 emissions, and ecological footprint in the USA: testing the EKC hypothesis with a structural break. Environmental Science and Pollution Research, 1-16. https://doi.org/10.1007/s11356-11020-10446-11353.
Pedroni P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and statistics, 61(S1): 653-670. https://doi.org/610.1111/1468-0084.0610s1653.
Pesaran MH. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22(2): 265-312. https://doi.org/210.1002/jae.1951.
Royston J. (1983). A Simple Method for Evaluating the Shapiro–Francia W′ Test of Nonnormality. Journal of the Royal Statistical Society: Series D (The Statistician), 32(3):297-300. https://doi.org/210.2307/2987935.
Royston, P. (1992). Approximating the Shapiro-Wilk W-test for non-normality. Statistics and computing, 2(3), 117-119. https://doi.org/110.1007/BF01891203.
Salahuddin, M., Alam, K., Ozturk, I., & Sohag, K. (2018). The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait. Renewable and sustainable energy reviews, 81, 2002-2010.‌ https://doi.org/10.1016/j.rser.2017.06.009
Saidi K., Mbarek MB. (2017). The impact of income, trade, urbanization, and financial development on CO2 emissions in 19 emerging economies. Environmental Science and Pollution Research, 24(14):12748-12757. https://doi.org/12710.11007/s11356-12016-16303-12743.
Saqib, N., Usman, M., Ozturk, I., & Sharif, A. (2024). Harnessing the synergistic impacts of environmental innovations, financial development, green growth, and ecological footprint through the lens of SDGs policies for countries exhibiting high ecological footprints. Energy Policy, 184, 113863.‌
Saud S., Chen S., Haseeb A. (2019). Impact of financial development and economic growth on environmental quality: an empirical analysis from Belt and Road Initiative (BRI) countries. Environmental Science and Pollution Research, 26(3):2253-2269. https://doi.org/2210.1007/s11356-11018-13688-11351.
Sbia R., Shahbaz M., Hamdi H. (2014). A contribution of foreign direct investment, clean energy, trade openness, carbon emissions and economic growth to energy demand in UAE. Economic Modelling, 36:191-197. https://doi.org/110.1016/j.econmod.2013.1009.1047.
Seetanah, B., Sannassee, R. V., Fauzel, S., Soobaruth, Y., Giudici, G., & Nguyen, A. P. H. (2019). Impact of economic and financial development on environmental degradation: evidence from small island developing states (SIDS). Emerging Markets Finance and Trade, 55(2), 308-322.‌ https://doi.org/10.1080/1540496X.2018.1519696
Shahabadi, A., & Feyzi, S. (2016). The relationship between natural resources abundance, foreign direct investment and environmental performance in selected oil and developed countries during 1996-2013. International Journal of Resistive Economics, 4(3), 101-116.‌
Shahbaz, M., Khan, S., Ali, A., & Bhattacharya, M. (2017). The impact of globalization on CO2 emissions in China. The Singapore Economic Review, 62(04), 929-957.‌ https://doi.org/10.1142/S0217590817400331
Shahbaz, M., Haouas, I., Sohag, K., & Ozturk, I. (2020). The financial development-environmental degradation nexus in the United Arab Emirates: the importance of growth, globalization and structural breaks. Environmental Science and Pollution Research, 27, 10685-10699.‌
Shahbaz, M., Destek, M. A., Dong, K., & Jiao, Z. (2021). Time-varying impact of financial development on carbon emissions in G-7 countries: Evidence from the long history. Technological Forecasting and Social Change, 171, 120966.‌ https://doi.org/10.1016/j.techfore.2021.120966.
Sunday-Adebayo, T., Saint Akadiri, S., Haouas, I., & Rjoub, H. (2023). A time-varying analysis between financial development and carbon emissions: evidence from the MINT countries. Energy & Environment, 34(5), 1207-1227.‌ https://doi.org/10.1177/0958305X221082092
Umar, M., Ji, X., Kirikkaleli, D., & Xu, Q. (2020). COP21 Roadmap: Do innovation, financial development, and transportation infrastructure matter for environmental sustainability in China?. Journal of environmental management, 271, 111026.‌ https://doi.org/10.1016/j.jenvman.2020.111026
World Bank Data (WBD). (2020). https://databank.worldbank.org/home.
Xu B., Lin B. (2018). What cause large regional differences in PM2. 5 pollutions in China? Evidence from quantile regression model. Journal of Cleaner Production, 174: 447-461. https://doi.org/410.1016/j.jclepro.2017.1011.1008.
Xu, Z., Baloch, M. A., Meng, F., Zhang, J., & Mahmood, Z. (2018). Nexus between financial development and CO 2 emissions in Saudi Arabia: analyzing the role of globalization. Environmental Science and Pollution Research, 25, 28378-28390.‌
Wang, Z., Yan, H., Gao, X., Liang, Q., Mi, Z., & Liu, L. (2024). Have consumption-based CO2 emissions in developed countries peaked?. Energy Policy, 184, 113894.‌ https://doi.org/10.1016/j.enpol.2023.113894
Wang, C., Zhou, D., Guo, X., & Kayani, U. N. (2024). Role of natural resource rents, financial development and technological research in achieving sustainable development: A study of South Asian Countries. Resources Policy, 89, 104632.‌ https://doi.org/10.1016/j.resourpol.2023.104632
Wu, Y., Wang, P., Liu, X., Chen, J., & Song, M. (2020). Analysis of regional carbon allocation and carbon trading based on net primary productivity in China. China Economic Review, 60, 101401.‌ https://doi.org/10.1016/j.chieco.2019.101401
Yin, W., Kirkulak-Uludag, B., & Zhang, S. (2019). Is financial development in China green? Evidence from city level data. Journal of Cleaner Production, 211, 247-256.‌ https://doi.org/10.1016/j.jclepro.2018.11.106
Zakaria, M., & Bibi, S. (2019). Financial development and environment in South Asia: the role of institutional quality. Environmental Science and Pollution Research, 26, 7926-7937.‌
Zafar, M. W., Saud, S., & Hou, F. (2019). The impact of globalization and financial development on environmental quality: evidence from selected countries in the Organization for Economic Co-operation and Development (OECD). Environmental science and pollution research, 26, 13246-13262.‌
Zhang S., Liu X., Bae J. (2017). Does trade openness affect CO2 emissions: evidence from ten newly industrialized countries? Environmental Science and Pollution Research, 24(21): 17616-17625. https://doi.org/17610.11007/s11356-17017-19392-17618.
Zhao, J., Shahbaz, M., Dong, X., & Dong, K. (2021). How does financial risk affect global CO2 emissions? The role of technological innovation. Technological Forecasting and Social Change, 168, 120751.‌ https://doi.org/10.1016/j.techfore.2021.120751
Zhao, B., & Yang, W. (2020). Does financial development influence CO2 emissions? A Chinese province-level study. Energy, 200, 117523.‌ https://doi.org/10.1016/j.energy.2020.117523