Financing low-carbon growth in Africa: Policy path for strengthening the links between financial intermediation, resource allocation and environmental sustainability

Abstract

Financial intermediation drives resource allocation in the economy, which can influence the carbon emission intensity of economic output (CO2gdp). This study examines the impact of bank credit allocation on CO2gdp in African economies during the period 1995–2018. Two policy scenarios are empirically evaluated, taking into account the behaviour of financial intermediaries with limited financial resources for credit supply to the productive sectors. Policy Scenario I, a credit allocation system that places a greater emphasis on financing demands of government and state-owned enterprises (GSEs), has a positive (increasing) effect on CO2gdp. The alternative policy scenario, Policy Scenario II, which places a greater emphasis on financing demands of private sector entities (PSUs), has a negative (decreasing) effect on CO2gdp with stronger impact in the more carbon-intensive economies. In addition, renewable energy consumption makes greater contribution to reducing CO2gdp under Policy Scenario II. By implication, more credit supply to the PSUs strengthens the link between resource allocation and economic efficiency, resulting in the creation of greener economic output. Thus, the development of financial intermediation could play a role in helping African economies avoid carbon-intensive path to economic growth. • Credit allocation and carbon intensity of economic output in Africa examined. • Under Policy scenario I more credit are allocated to government-owned firms. • Under Policy scenario II more credit are allocated to the private sector. • Policy scenario II strengthens low-carbon growth. • The impact of renewable energy consumption increases under Policy Scenario II.