"Could Financial Deepening Be the Solution to the Carbon Emission Problem? Empirical Evidence from CEE Countries"

Abstract

"Financial deepening has increased in recent de cades in CEE countries that have transitioned from a centrally planned economy to a market economy. However, its impact on carbon emissions is con troversial. Although the determinants of emissions have been frequently examined in line with the EU’s goal of net zero carbon emissions, the empirical lit erature on the effects of financial deepening is insuf ficient. In that context, this study aims to investigate the impact of financial depth on the level of carbon emissions in CEE counties. A panel threshold regres sion model was carried out for a set of 11 countries, from 1995 to 2018. The main findings confirmed the existence of a double threshold effect. While in the low financial depth regime, financial deepening increases carbon emissions, in the medium regime it reduces them. In the high regime, however, no sta tistically significant effects were observed regarding the effects of the financial deepening. Moreover, emissions are reduced with taxes. None of the countries in the sample has financial depth index value between threshold values, according to the last three years’ averages. The findings argue that financial deepening will not be an adequate solution to reducing emissions and point to the importance of public tax policies."