How financial development affects CO₂ emissions: A spatial econometric analysis

Based on panel data from 97 countries over the period of 2000-2014, this study uses the spatial econometric model to reexamine the effect of financial development on CO₂ emissions. The results indicated that there was a spatial correlation between CO₂ emissions among countries during this period. More importantly, we found that a country's CO₂ emissions could be influenced by the financial development of its neighbors. Specifically, the significantly negative spillover effect of financial development on CO₂ emissions dominated the significant positive direct effect, thus suggesting a significant negative total effect. These findings imply that financial development plays a fundamental role in the mitigation of CO₂ emissions, and that being surrounded by nearby countries with a high financial development could improve a country's environmental performance. These empirical insights are of particular relevance to policymakers as they act as a reminder of the importance of considering the influence of financial development both in a given country and in its neighboring countries.