Does financial development spur environmental and energy‐related innovation in Brazil?

Abstract

AbstractThere is a well‐established set of literature on the energy‐growth‐finance nexus, especially for emerging economies; however, we identify two key gaps and address them in this study. First, the applied macroeconometrics literature suggests that macroeconomics time‐series possesses a potential structural break(s) if not identified, which may result in large estimation errors. Second, although assessing the impact of financial development, the role of market capitalization and innovation have been ignored. Therefore, this study fills these gaps and incorporates the role of technological innovation and market capitalization on energy demand and carbon dioxide emissions in the presence of financial development, gross domestic product (GDP) and exports. Using extended time‐series data over the period of 1980–2014 for Brazil, this study utilizes a structural break unit root test prior to autoregressive distributed lag (ARDL) model to test the long‐run equilibrium relationship amongst all the underlying variables. The ARDL results found that all of the vectors are cointegrated. Furthermore, long‐run estimates validate the environmental Kuznet's curve (EKC) hypothesis for Brazil and conclude that exports are the key driver of CO2 emissions and energy demand in the country. However, financial development, market capitalization and technological innovation reduce the intensity of both the energy demand and emissions in the country. Causal analysis suggests that the exports increase financial development and innovation and in return, financial development and technological innovation decrease CO2 emissions in the country. The results are robust and useful for policy control use.