Does private financial development present a trade-off for CO2 emissions reduction in Oman? Evidence from Markov-switching model

Abstract

ABSTRACT The expansion of the financial sector is often promoted to facilitate economic growth. Nevertheless, the potential implications of financial development on environmental indicators, specifically carbon dioxide (CO2) emissions, have become a subject of concern. This research investigates the impact of financial development on CO2 emissions in Oman, along with other control variables including energy consumption, trade openness, and economic growth, using a Markov switching model. The analysis is conducted for the period from 1989 to 2020 and focuses on two regimes of high and low carbon emissions. The results of the Markov switching model show that energy consumption, gross domestic product (GDP), and private financial development have a significant positive effect on CO2 emissions. Although the study confirms the Kuznets curve, Oman is still in its initial phase. Moreover, our results suggest a higher likelihood of remaining in the high CO2 emissions regime. This underscores the importance for policymakers to carefully weigh the trade-offs associated with fostering financial development, particularly within climate change mitigation endeavors. These findings are highly relevant for policymakers striving to balance economic growth with the reduction of carbon emissions in Oman.