From pollution to prosperity: Investigating the Environmental Kuznets curve and pollution-haven hypothesis in sub-Saharan Africa's industrial sector

Abstract

Drivers of environmental change and policy processes are pushing the sub-Saharan African region to do more in the struggle against climate change as the region suffers most from climate change impact. To this end, this study investigates how the interaction effects of a sustainable financing model in energy use influence carbon emissions in Sub-Saharan African economies. It is based on the theory that energy consumption is determined by increased economic financing. Panel data analysis of thirteen countries from 1995 to 2019 is used to explore the interaction effect on CO2 emissions, taking a market-induced energy demand perspective. The study employed the fully modified ordinary least squares technique, removing all heterogeneity effects in a panel estimation. The econometric model was estimated with (and without) the interaction effect. The study finds support for the Pollution-Haven hypothesis and the Environmental Kuznets “inverted U-shaped” Curve Hypothesis in the region. It identifies a long-run relationship between the financial sector, economic activity, and CO2 emissions, with fossil fuel consumption in industrial activities increasing CO2 emissions by about 2.5 times. However, the study also reveals that the interactive effect of financial development can significantly reduce CO2 emissions, providing important implications for policymakers in Africa. The study suggests regulatory incentives to encourage banking credit intermediation for environmentally friendly energy sources. This research makes a valuable contribution to understanding the environmental impact of the financial sector in sub-Saharan Africa, an area that has received limited empirical attention. The findings highlight the relevance of the financial sector for policy formulation in addressing environmental issues in the region.