The Role of Financial Development and Capital Formation in Promoting Renewable Energy in Bangladesh

Abstract

Bangladesh, rich in various resources, stands at a pivotal point where the sustainable use of renewable energy can be significantly increased. This study focuses on analyzing the impact of financial development (FD), foreign direct investment (FDI), economic growth, carbon dioxide emissions, and capital formation on renewable energy consumption in Bangladesh. Using time series data from 1991 to 2020 and employing the ARDL bounds testing approach to cointegration, the study provides a comprehensive analysis of these factors. The results reveal a long-term positive relationship between financial development and capital formation with renewable energy consumption, while FDI and economic growth do not significantly influence renewable energy use in the long run. Conversely, carbon dioxide emissions negatively impact renewable energy consumption in both the short and long term. The short-term analysis further indicates a negative relationship between capital formation, FDI, and renewable energy consumption, but financial development shows a positive and significant impact. These findings emphasize the need to enhance our understanding of the role of capital formation and financial development in promoting renewable energy, not just in Bangladesh but also in other developing and developed nations. To curb environmental damage and increase the use of renewable energy, eliminating fossil fuel subsidies and introducing a carbon tax on non-renewable energy use is crucial. Furthermore, Bangladeshi policymakers should advocate for green financing and allocate more funds to clean renewable energy projects, laying the groundwork for a robust renewable energy economy. Received: 3 August 2024 / Accepted: 11 November 2024 / Published: 20 November 2024