Natural resources extraction and green finance: Dutch disease and COP27 targets for OECD countries

Abstract

The temperature goal of the Paris Agreement is to keep the world temperature within 1.5 °C between 2020 and 2025 by reducing emissions. However, emissions continuously rose at the end of 2021. Therefore, it is an urgent need for a conference of COP27 to accelerate the action against climate change and put special attention to green finance. Hence, this study aims to examine the impacts of natural resource extraction, the composite risk index, international trade, and the stringency of environmental policy on green finance in OECD economies from 2004 to 2020 in light of Dutch Diseases and to achieve COP27 targets for OECD economies. Additionally, to analyze the above-mentioned objective, this study uses the cross-sectional dependence, panel cross-section Heteroscedasticity LR test, five different unit root tests (LLC, Breitung t-test, lm-Pesaran, ADP, and PP), Kao Residual and Johansen Fisher panel co-integration test. Finally, the results of MM-QR elucidate that natural resource extraction, trade openness, and composite risk index negatively affected green finance. At the same time, GDP per unit of energy consumption and environmental stringency policies increase green financing in OECD economics. Frequently, more natural resource extraction could lead to Dutch Disease because of appreciation of that country's exchange rate, which might decrease a country's export. Furthermore, this study suggests that government should raise the fund for green financing because green financing will not only help to reduce the natural resource extraction in a country but will also help to decrease the effect of Dutch Disease. Check and balance on natural resources extraction is crucial to bring stability.