Examining the Impact of Financial Development on Carbon Emissions: Insights from Emerging Economies

Year 2025, Volume: 75 Issue: 1, 156 - 169, 14.07.2025

Umut Halaç , Fatma Deniz Dermenci , Seher Gören Yargı , Melis Gultekin Aslan

https://doi.org/10.26650/ISTJECON2024-1531009

Abstract

This study investigates the impact of financial market development on the environmental quality of emerging countries through an analysis of panel data from 21 Emerging Countries covering the period from 2001 to 2023. To accomplish this objective, we constructed stock market-based and banking sectorbased indices to measure the level of financial market development using principal component analysis. We then identified the cross-sectional dependence and employed unit root testing to ensure accurate estimation. By employing a panel ARDL bound test, we demonstrate that financial development positively impacts environmental quality in emerging countries. The findings provide new insights for researchers and policymakers who seek to develop comprehensive energy supply and economic policies to alleviate the adverse effects of pollution.

JEL Classification : O1 , O13 , F6 , F64

Keywords

Financial development, Environmental quality, CO2 Emissions, Panel ARDL bound test, Emerging countries

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