Towards carbon neutrality: asymmetric impact of financial development and digitalization on carbon dioxide emissions in Mediterranean countries

Abstract

The current research investigates the impact of financial development, digitalization, green trade, manufacturing, and national income on carbon dioxide (CO2) emissions of six Mediterranean countries (MEDIT-6). The study uses a nonlinear panel quantile regression model with panel data of MEDIT-6 countries from 1994 to 2022. The study asserts that higher financial development will reduce CO2 emissions for MEDIT-6 countries, as it provides more financing options to invest in green energy and potentially curb excessive energy consumption which in turn reduces CO2 emissions. The study also provides evidence that digitalization in MEDIT-6 countries has led to dematerialization, thereby reducing CO2 emissions. Digitalization makes trade and commerce platforms more efficient by facilitating the smooth flow of information and enhancing the efficiency of production processes. The positive relationship between manufacturing and national income and CO2 emissions exhibits a U-shaped pattern, which supports the existence of Environmental Kuznets Curve (EKC) hypothesis. The study shows how the MEDIT-6 countries have been successful in promoting financial development and digitalization, which helps reduce their CO2 emissions. However, it also raises concerns for policymakers as promoting developmental activities such as manufacturing is inevitable, but it comes with environmental challenges such as higher CO2 emissions. The current study contributes to the reservoir of existing literature by providing fresh evidence from the Mediterranean region on the impact of financial development and digitalization on CO2 emissions. Graphical Abstract: (Figure presented.)