DOES THE EFFECT OF FINANCIAL DEVELOPMENT ON CARBON EMISSIONS VARY BETWEEN DEVELOPED AND DEVELOPING COUNTRIES?

Year 2024, Volume: 20 Issue: 4, 993 - 1009, 31.12.2024

Emrah Öget

https://doi.org/10.17130/ijmeb.1490436

Abstract

This study examines the relationship between financial development and carbon emission for
21 developed and 22 developing countries throughout 2001-2020. There is heterogeneity in slope
coefficient and cross-section dependence in residuals. For this reason, the second-generation panel unit
root and cointegration tests were applied to investigate the integration order of the series and the longrun
relationship, respectively. Additionally, this study utilized the pooled FMOLS and DOLS estimators
to determine the long-run coefficients. While cointegration results confirm the long-run relationship
between financial development and carbon emissions, pooled DOLS and FMOLS results show that
financial development has an increasing effect on carbon emissions for both developed and developing
countries. For the DOLS estimator, where statistically more significant results were obtained, individual
DOLS results were examined, and it was seen that financial development reduced carbon emissions
in approximately 55% of developed countries and approximately 28% of developing countries. It is
understood that the positive effect of the pooled results originates from Belgium, Denmark, South Korea,
and the United States, where financial development has a highly increasing effect on carbon emissions.
These results cast doubt on the validity of the EKC hypothesis for these countries.

Keywords

Financial Development, Carbon Emission, EKC hypothesis, DOLS, FMOLS

FİNANSAL GELİŞİMİN KARBON EMİSYONLARI ÜZERİNDEKİ ETKİSİ GELİŞMİŞ VE GELİŞMEKTE OLAN ÜLKELER ARASINDA FARKLILIK GÖSTERİYOR MU?

Abstract

Bu çalışmada, 2001-2020 dönemi için 21 gelişmiş ve 22 gelişmekte olan ülke için finansal
gelişme ile karbon emisyonu arasındaki ilişki incelenmektedir. Kalıntılarda eğim katsayısı ve kesit
bağımlılığında heterojenlik bulunmaktadır. Bu nedenle serinin bütünleşme derecesi ve uzun dönem
ilişkisini araştırmak için sırasıyla ikinci nesil panel birim kök testi ve eşbütünleşme testi uygulanmıştır.
Ayrıca, bu çalışmada uzun dönem katsayılarını belirlemek için birleştirilmiş FMOLS ve DOLS tahmin
edicilerinden yararlanılmıştır. Eşbütünleşme sonuçları finansal gelişme ile karbon emisyonları
arasındaki uzun dönemli ilişkiyi teyit ederken, panel DOLS ve FMOLS sonuçları finansal gelişmenin
hem gelişmiş hem de gelişmekte olan ülkeler için karbon emisyonları üzerinde artırıcı bir etkiye sahip
olduğunu göstermektedir. İstatistiksel olarak daha anlamlı sonuçların elde edildiği DOLS tahmin edicisi eneriçin
ise bireysel DOLS sonuçları incelenmiş ve gelişmiş ülkelerin yaklaşık %55’inde ve gelişmekte olan
ülkelerin yaklaşık %28’inde finansal gelişmenin karbon emisyonları üzerinde azaltıcı bir etkiye sahip
olduğu görülmüştür. Panel sonuçlardaki pozitif etkinin, finansal gelişimin karbon emisyonları üzerinde
oldukça artan bir etkiye sahip olduğu Belçika, Danimarka, Güney Kore ve Amerika Birleşik Devletleri
ülkelerinden kaynaklandığı anlaşılmaktadır. Bu sonuçlar EKC hipotezinin geçerliliğinin bu ülkeler için
şüpheli olduğunu göstermektedir.

Keywords

: Finansal Gelişme, Karbon Emisyonu, EKC hipotezi, DOLS, FMOLS

References

• Abbasi, F., & Riaz, K. (2016). CO2 emissions and financial development in an emerging economy: An augmented VAR approach. Energy Policy, 90, 102-114. https://doi.org/10.1016/j.enpol.2015.12.017
• Acheampong, A. O. (2019). Modeling for insight: Does financial development improve environmental quality? Energy Economics, 83, 156-179. https://doi.org/10.1016/j.eneco.2019.06.025
• Adebayo, T. S., & Odugbesan, J. A. (2021). Modeling CO2 emissions in South Africa: Empirical evidence from ARDL based bounds and wavelet coherence techniques. Environmental Science and Pollution Research, 28, 9377–9389. https://doi.org/10.1007/s11356-020-11442-3
• Ahmad, M., Khan, Z., Rahman, Z. U., & Khan, S. (2018). Does financial development asymmetrically affect CO2 emissions in China? An application of the nonlinear autoregressive distributed lag (NARDL) model. Carbon Management, 9(6), 631-644. https://doi.org/10.1080/17583004.2018 .1529998
• Ang, G., Röttgers, D., & Burli, P. (2017). The empirics of enabling investment and innovation in renewable energy. OECD Environment Working Papers, No. 123, OECD Publishing, Paris. https://doi. org/10.1787/67d221b8-en
• Anser, M. K., Yousaf, Z., Zaman, K., Nassani, A. A., Alotaibi, S. M., Jambari, H. & Kabbani, A. (2020). Determination of resource curse hypothesis in mediation of financial development and clean energy sources: Go-for-green resource policies. Resources Policy, 66, 1-14. https://doi.org/10.1016/j. resourpol.2020.101640
• Begum, H., & Aziz, S. I. (2019). Impact of domestic credit to private sector on gross domestic product in Bangladesh. IOSR Journal of Economics and Finance, 10(1), 45-54. doi: 10.9790/5933- 1001014554
• Betzold, C. (2016). Fuelling the Pacific: Aid for renewable energy across Pacific Island countries. Renewable and Sustainable Energy Reviews, 58, 311-318. https://doi.org/10.1016/j.rser.2015.12.156
• Bist, J. P. (2018). Financial development and economic growth: Evidence from a panel of 16 African and non-African low-income countries. Cogent Economics & Finance, 6, 1-17. https://doi.org/10.10 80/23322039.2018.1449780
• Boutabba, M. A. (2014). The impact of financial development, income, energy and trade on carbon emissions: Evidence from the Indian economy. Economic Modelling, 40, 33-41. https://doi. org/10.1016/j.econmod.2014.03.005
• Charfeddine, L., & Kahia, M. (2019). Impact of renewable energy consumption and financial development on CO2 emissions and economic growth in the MENA region: A panel vector autoregressive (PVAR) analysis. Renewable Energy, 139, 198-213. https://doi.org/10.1016/j.renene.2019.01.010
• Cheng, C., Ren, X., Wang, Z., & Yan, C. (2019). Heterogeneous impacts of renewable energy and environmental patents on CO2 emission - Evidence from the BRIICS. Science of the Total Environment, 668, 1328-1338. https://doi.org/10.1016/j.scitotenv.2019.02.063
• Çetin, M., Ecevit, E., & Yücel, A. G. (2018). The impact of economic growth, energy consumption, trade openness, and financial development on carbon emissions: Empirical evidence from Turkey. Environmental Science and Pollution Research, (25), 36589–36603. https://doi.org/10.1007/ s11356-018-3526-5
• Dar, J. A., & Asif, M. (2018). Does financial development improve environmental quality in Turkey? An application of endogenous structural breaks based cointegration approach. Management of Environmental Quality: An International Journal, 29(2), 368-384. https://doi.org/10.1108/MEQ- 02-2017-0021
• Dogan, E., & Seker, F. (2016). Determinants of CO2 emissions in the European Union: The role of renewable and non-renewable energy. Renewable Energy, 94, 429-439. https://doi.org/10.1016/j. renene.2016.03.078
• Du, Q., Zhou, J., Pan, T., Sun, Q., & Wu, M. (2019). Relationship of carbon emissions and economic growth in China’s construction industry. Journal of Cleaner Production, 220, 99-109. https://doi. org/10.1016/j.jclepro.2019.02.123
• Ehigiamusoe, K. U., & Lean, H. H. (2019). Effects of energy consumption, economic growth, and financial development on carbon emissions: Evidence from heterogeneous income groups. Environmental Science and Pollution Research, 26, 22611–22624. https://doi.org/10.1007/s11356-019- 05309-5
• Fadly, D. (2019). Low-carbon transition: Private sector investment in renewable energy projects in developing countries. World Development, 122, 552-569. https://doi.org/10.1016/j.worlddev. 2019.06.015
• Faisal, F., Azizullah, Tursoy, T., & Pervaiz, R. (2020). Does ICT lessen CO2 emissions for fast-emerging economies? An application of the heterogeneous panel estimations. Environmental Science and Pollution Research, 27, 10778–10789. https://doi.org/10.1007/s11356-019-07582-w
• FTSE Russell (Sep. 2022). FTSE Classification of Equity Markets [Annual Announcement]. Available online: https://research.ftserussell.com/products/downloads/FTSE-Country-Classification-Update_ latest.pdf
• Ganda, F. (2019). The environmental impacts of financial development in OECD countries: A panel GMM approach. Environmental Science and Pollution Research, 26, 6758–6772. https://doi. org/10.1007/s11356-019-04143-z
• Gök, A. (2020). The role of financial development on carbon emissions: A meta regression analysis. Environmental Science and Pollution Research, 27, 11618–11636. https://doi.org/10.1007/s11356- 020-07641-7
• Grossman, G. M., & Krueger, A. B. (1995). Economic growth and the environment. The Quarterly Journal of Economics, 110(2), 353-377. https://doi.org/10.2307/2118443
• Guru, B. K., & Yadav, I. S. (2019). Financial development and economic growth: Panel evidence from BRICS. Journal of Economics, Finance and Administrative Science, 24(47), 113-126. https://doi. org/10.1108/JEFAS-12-2017-0125
• Herrerias, M. J., Joyeux, R. & Girardin, E. (2013). Short-and long-run causality between energy consumption and economic growth: Evidence across regions in China. Appl. Energy, 112, 1483- 1492. https://doi.org/10.1016/j.apenergy.2013.04.054
• International Finance Corporation (IFC). 2013. Mobilizing Public and Private Funds for Inclusive Green Growth Investment in Developing Countries, A Stocktaking Report Prepared for the G20 Development Working Group. Washington, DC 20433.
• Jalil, A., & Feridun, M. (2011). The impact of growth, energy and financial development on the environment in China: A cointegration analysis. Energy Economics, 33(2), 284-291. https://doi. org/10.1016/j.eneco.2010.10.003
• Kim, D. H., Wu, Y. C., & Lin, S. C. (2020). Carbon dioxide emissions and the finance curse. Energy Economics, 88, 1-16. https://doi.org/10.1016/j.eneco.2020.104788
• Lahiani, A. (2020). Is financial development good for the environment? An asymmetric analysis with CO2 emissions in China. Environmental Science and Pollution Research, 27, 7901–7909. https://doi. org/10.1007/s11356-019-07467-y
• Levine, L. (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688-726. Available at https://www.jstor.org/stable/2729790
• Li, F., Zhang, J., & Li, X. (2022). Research on supporting developing countries to achieve green development transition: Based on the perspective of renewable energy and foreign direct investment. Journal of Cleaner Production, 372, 1-17. https://doi.org/10.1016/j.jclepro.2022.133726
• Liu, H., Wong, W.-K., Cong, P. T., Nassani, A. A., Haffar, M., & Abu-Rumman, A. (2022). Linkage among urbanization, energy consumption, economic growth and carbon emissions. Panel data analysis for China using ARDL model. Fuel, 332, 1-7. https://doi.org/10.1016/j.fuel.2022.126122
• Lv, Z., & Li, S. (2021). How financial development affects CO2 emissions: A spatial econometric analysis. Journal of Environmental Management, 277, 1-10. https://doi.org/10.1016/j.jenvman. 2020.111397
• Maji, I. K., Habibullah, M. S., & Saarİ, M. Y. (2017). Financial development and sectoral CO2 emissions in Malaysia. Environmental Science and Pollution Research, 24, 7160-7176. https://doi. org/10.1007/s11356-016-8326-1
• Majumdar, S., & Paris, C. M. (2022). Environmental impact of urbanization, bank credits, and energy use in the UAE—A tourism-induced EKC model. Sustainability, 14, 1-14. https://doi.org/10.3390/ su14137834
• Matthaus, D., & Mehling, M. (2020). De-risking renewable energy investments in developing countries: A multilateral guarantee mechanism. Joule, 4(12), 2627-2645. https://doi.org/10.1016/j. joule.2020.10.011
• Mrabet, Z., & Alsamara, M. (2017). Testing the Kuznets Curve hypothesis for Qatar: A comparison between carbon dioxide and ecological footprint. Renewable and Sustainable Energy Reviews, 70, 1366-1375. https://doi.org/10.1016/j.rser.2016.12.039
• Muftau, O., Iyoboyi, M., & Ademola, A. S. (2014). An empirical analysis of the relationship between CO2 emission and economic growth in West Africa. American Journal of Economics, 4(1), 1-17. https://doi.org/10.5923/j.economics.20140401.01
• Neog, Y., & Yadava, A. K. (2020). Nexus among CO2 emissions, remittances, and financial development: A NARDL approach for India. Environmental Science and Pollution Research, 27, 44470–44481. https://doi.org/10.1007/s11356-020-10198-0
• Nwani, C., & Omoke, P. C. (2020). Does bank credit to the private sector promote low-carbon development in Brazil? An extended STIRPAT analysis using dynamic ARDL simulations. Environmental Science and Pollution Research, 27, 31408–31426. https://doi.org/10.1007/s11356-020- 09415-7
• Nyambuu, U., & Semmler, W. (2020). Climate change and the transition to a low carbon economy – Carbon targets and the carbon budget. Economic Modelling, 84, 367-376. https://doi.org/10.1016/j. econmod.2019.04.026
• Obiora, S. C., Bamisile, O., Opoku-Mensah, E., & Frimpong, A. N. (2020). Impact of banking and financial systems on environmental sustainability: An overarching study of developing, emerging, and developed economies. Sustainability, 12(19), 1-21. https://doi.org/10.3390/su12198074
• Omri, A. (2013). CO2 emissions, energy consumption and economic growth nexus in MENA countries: Evidence from simultaneous equations models. Energy Economics, 40, 667-664. https://doi. org/10.1016/j.eneco.2013.09.003
• Our World in Data. (n.d.). CO2 emissions [data]. Retrieved 10.02.2022 from https://ourworldindata.org/ co2-emissions
• Öztürk, İ., & Acaravci, A. (2013). The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36, 262-267. https:// doi.org/10.1016/j.eneco.2012.08.025
• Park, Y., Meng, F., & Baloch, M. A. (2018). The effect of ICT, financial development, growth, and trade openness on CO2 emissions: An empirical analysis. Environmental Science and Pollution Research, 25, 30708–30719. https://doi.org/10.1007/s11356-018-3108-6
• Pedroni, P. (2001). “Fully modified OLS for heterogeneous cointegrated panels”, Baltagi, B.H., Fomby, T.B. and Carter Hill, R. (Ed.) Nonstationary Panels, Panel Cointegration, and Dynamic Panels (Advances in Econometrics, Vol. 15), Emerald Group Publishing Limited, Bingley, pp. 93-130. https://doi.org/10.1016/S0731-9053(00)15004-2
• Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels. Cesifo Working Paper 1229, 1-39. Retrieved from www.cesifo.org/. Accessed 11.02.2022.
• Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence, Journal of Applied Econometrics, 22, 265-312. https://doi.org/10.1002/jae.951
• Pesaran, M. H. & Yamagata, T. (2008). Testing slope homogeneity in large panels, Journal of Econometrics, 142(1), 50-93. https://doi.org/10.1016/j.jeconom.2007.05.010
• Saidi, K., & Hammami, S. (2015). The impact of CO2 emissions and economic growth on energy consumption in 58 countries. Energy Reports, 1, 62-70. https://doi.org/10.1016/j.egyr.2015.01.003
• Samour, A., Isiksal, A. Z., & Resatoglu, N. G. (2019). Testing the impact of banking sector development on Turkey’s CO2 emissions. Applied Ecology and Environmental Research, 17(3), 6497-6513. https://doi.org/10.15666/aeer/1703_64976513
• Samour, A., Moyo, D., & Tursoy, T. (2022). Renewable energy, banking sector development, and carbon dioxide emissions nexus: A path toward sustainable development in South Africa. Renewable Energy, 193, 1032-1040. https://doi.org/10.1016/j.renene.2022.05.013
• Senshaw, D. A., & Kim, J. W. (2018). Meeting conditional targets in nationally determined contributions of developing countries: Renewable energy targets and required investment of GGGI member and partner countries. Energy Policy, 116, 433-443. https://doi.org/10.1016/j.enpol.2018.02.017
• Shahbaz, M., Ilarslan, K., Yıldız, M., & Vo, X. V. (2022). Investigation of economic and financial determinants of carbon emissions by panel quantile regression analysis: The case of Visegrád countries. Environmental Science and Pollution Research, 29, 60777–60791. https://doi.org/10.1007/ s11356-022-20122-3
• Shahbaz, M., Uddin, G. S., Rehman, I. U., & Imran, K. (2014). Industrialization, electricity consumption and CO2 emissions in Bangladesh. Renewable and Sustainable Energy Reviews, 31, 575-586. https://doi.org/10.1016/j.rser.2013.12.028
• Stock, J. H. & Watson, M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems, Econometrica, 61, 783–820. https://doi.org/10.2307/2951763
• Sugiawan, Y., Kurniawan, R., & Managi, S. (2019). Are carbon dioxide emission reductions compatible with sustainable well-being? Applied Energy, 242, 1-11. https://doi.org/10.1016/j.apenergy. 2019.03.113
• Tsaurai, K. (2019). The impact of financial development on carbon emissions in Africa. International Journal of Energy Economics and Policy, 9(3), 144-153. https://doi.org/10.32479/ijeep.7073
• Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709-748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
• World Bank (n. d.). Domestic credit to private sector by banks (% of GDP) [data]. Retrieved from https:// data.worldbank.org/. Accessed 10.02.2022.
• Xiumei, S., Min, Z., & Ming, Z. (2011). Empirical study on the relationship between economic growth and carbon emissions in resource-dependent cities based on vector autoregression model. Energy Procedia, 5, 2461-2467. https://doi.org/10.1016/j.egypro.2011.03.423
• Xu, B., Li, S., Afzal, A., Mirza, N., & Zhang, M. (2022). The impact of financial development on environmental sustainability: A European perspective. Resources Policy, 78, 1-8. https://doi. org/10.1016/j.resourpol.2022.102814
• Yang, B., Ali, M., Nazir, M. R., Ullah, W., & Qayyum, M. (2020). Financial instability and CO2 emissions: Cross-country evidence. Air Quality, Atmosphere & Health, 13, 459-468. https://doi. org/10.1007/s11869-020-00809-7