Expansion of financial system and production-based carbon emissions: evidence from high-income countries

Abstract

The recent environmental and energy economics is more influential towards sustainability of the environment. Unlike the existing literature covering extensively consumption-based carbon emissions factors, this research tends to identify the factors influencing production-based carbon emissions in the G7 economies from 1989 to 2020. The study utilised various panel econometric approaches to find the presence of cross-section dependence, stationarity of variables, and the validation of long-run cointegration association between the variables. This study uses a non-parametric long-run estimator (method of moment quantile regression) to explore the association between these variables at four (Q0.25, Q0.50, Q0.75, Q0.90) quantiles. The estimated results revealed that economic growth is a significant positive factor of production-based carbon emissions, whereas the influence of imports is positive but insignificant across the quantiles. On the other hand, this study found the negative and significant influence of exports and financial expansion on the production-based carbon emissions and helps to achieve environmental sustainability in the region. The non-parametric (bootstrap quantile regression) and parametric (robust regression) robustness tests also validate the earlier estimator’s empirical findings. Based on the results obtained, this study recommends increased investment in environmentally friendly energy resources, technologies, and energy efficiency, increased exports, and strengthening financial institutions.