An Investigation of the Dynamic Relationships Between Financial Development, Renewable Energy Use, and CO2 Emissions

Abstract

Understanding the drivers of CO2 emissions has been necessary in drafting policies to curb global warming. In this study, we examine the impact of disaggregated financial development components on CO2 emissions by taking into account the multifaceted and complicated structure of modern financial systems in 46 countries of Sub-Saharan Africa between 1991 and 2016. The empirical models are estimated using a system-GMM approach. The analysis shows that the development of financial markets and their components, including access, depth, and efficiency, contribute to CO2 emissions in the region. For financial institutions development and its sub-measures, similar effects are observed. However, financial market development has less adverse environmental effects than the development of financial institutions. Renewable energy consumption also leads to substantial reductions in CO2 emissions. The financial markets are playing an increasingly important role in complementing renewable energy for environmental improvement. The study also indicates that the relationship between these variables and CO2 emissions varies at a country-level depending on the economy of the country. The study also discusses the policy implications of these findings.