Abstract
This inquiry contributes to the previous literature by analyzing the empirical linkage between the development of the financial sector and carbon emissions in the presence of good governance. Specifically, we examine the ability of good governance in moderating the negative effect of financial development on environmental quality in Saudi Arabia over the period 1996-2016. Different indicators of financial development and governance quality are included in the analysis. Using the Dynamic Ordinary Least Squares (DOLS) estimator, we find (i) the exostence of unconditional effects of the three indicators of financial sector development on increasing carbon emissions in most models; (ii) the indicators of governance quality increase carbon emissions in most models; (iii) the net effects on CO2 emissions are negative from the complementarity between the indicators of financial sector development and political and institutional governance, meaning that the development of financial sector reduces carbon emissions if it is accompanied by good institutional and political governance.
Highlights
Environmental change, which has attracted the attention of policymakers, environmentalists as well as international organizations, has become a global concern over the past two decades
Regarding the conditional impact of governance quality, it is clear from most of the estimated models that, as expected, good governance reduces per capita CO2 emissions, ranging from -0.076 to -0.202 percent for the models pertaining to financial development index, from -0.091 to -0.211 percent for the models pertaining to domestic credit to private sector (DCPS), and from -0.099 to -0.210 percent for the models pertaining to private credit by deposit money banks and other financial institutions (PCFI)
These results suggest that the development of financial sector improves environmental quality if it is accompanied with good political and institutional governance, such as voice and accountability, political stability, the rule of law, and control of corruption
Summary
Environmental change, which has attracted the attention of policymakers, environmentalists as well as international organizations, has become a global concern over the past two decades. This awareness has brought about efforts to expand the model by incorporating pertinent variables related to economic structure, energy markets, trade openness, etc In this contribution, we try to examine the influence of governance quality and financial development on carbon emissions in the case of Saudi Arabia's country. The prevailing literature currently on the subject has focused mainly either on the nexus between governance and environment (Costantini and Monni, 2008; Samimi et al, 2012; Omri and Ben Mabrouk, 2020) or financial development-environment linkage (Jun et al, 2018; Gokmenoglu and Sadeghieh, 2019; Kayani et al, 2020; Shahzad et al, 2017; Charfeddine and Kahia, 2019) without recognizing how macro-level governance conditions can develop the financial sector to improve environmental quality.
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