The role of energy mix and financial development in greenhouse gas (GHG) emissions’ reduction: evidence from ten leading CO2 emitting countries

Abstract

This study explores the relationship between greenhouse gas (GHG) emissions, financial development and disaggregated energy consumption among the top 10 countries with the highest CO2 emissions (Canada, China, Germany, India, Iran, Japan, Korea Republic, Russia, UK and US). The study uses panel data for the period 1990–2014 within a multivariate framework. The econometric techniques of cross-sectional dependence unit root test, panel co-integration (Levine, Lin and Chun; Breitung; Im, Pesaran and Shin; Fisher-Augmented Dickey Fuller and Fisher-Phillips Perrron) tests, fully modified ordinary least squares (FMOLS) and Dumitrescu and Hurlin Granger causality tests are applied for the unit root test, co-integration, estimation of long-run coefficients as well as inference on the causal relationship respectively. Pesaran’s cross-sectional unit root test shows that variables are integrated of the first order. Pedroni’s heterogeneous panel co-integration tests reveal a long-run equilibrium relationship between the dependent and independent variables. The Granger-causality results indicate both short-run and long-run causality among renewable, fossil fuel energy and financial development and GHG emissions. The results’ findings have important policy implications for environmental quality, and thus, GHG emissions’ reduction using a higher percentage of energy from renewable energy. In addition, there is need for countries to increase financial support on renewable energy infrastructure construction as well as transformation of fossil fuel energy utilization.