Financial Development and Industrial Pollution

Abstract

We study how countries' financial structure affects their transition to low-carbon growth. Using global industry-level data, we document that carbon-intensive industries reduce emissions faster in economies with deeper stock markets. Two channels underpin this stylized fact. First, stock markets reallocate investment towards energy-efficient sectors. Second, in countries with deeper stock markets, carbon-intensive sectors engage in more green innovation, resulting in lower carbon emissions per unit of output. Only one-tenth of these industry-level reductions in domestic emissions are offset by carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equity in Belgium confirms our findings.