Does financial development mitigate carbon emissions? Evidence from heterogeneous financial economies

Abstract

In this paper, we investigate the impact of financial market development on carbon emission intensity, taking into account the various stages of financial development among countries. Utilising the instrumental variable generalised method of moment approach and a comprehensive panel dataset of a total of 83 countries over the period 1980–2015, we show that the overall financial market development and its sub-measures such as financial market depth and efficiency reduce carbon emission intensity in the developed and emerging financial economies. However, an opposing effect is found in the frontier financial economies. For standalone financial economies, the results show that the overall financial market development and its sub-indicators have no direct impact on carbon emission intensity. Finally, the non-linear and the moderating effects of financial market development on carbon emission intensity differ across countries at different stages of financial development. The policy implications are also discussed. • Comparative analysis of financial market development on CO 2 emission intensity • Financial markets development reduces CO 2 emission intensity in developed and emerging financial economies. • Financial markets development increases CO 2 emission intensity in frontier financial economies. • Financial markets development has no linear effect on CO 2 emission intensity in standalone financial economies. • Financial markets development moderates economic growth and energy to influence CO2 emission intensity.