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Investigating the Causality Between Financial Development and Carbon Emissions: A Quantile-Based Analysis.
Muhammad Mar'I1, Mehdi Seraj2, Turgut Tursoy1
1Department of Banking and Finance, Near East University, Nicosia, Cyprus.
Summary
Financial development significantly impacts carbon dioxide (CO2) emissions, with effects varying by country and financial sector. Prioritizing green finance is crucial for mitigating CO2 emissions and promoting environmental sustainability.
Area of Science:
- Environmental Economics
- Financial Economics
- Sustainable Development
Background:
- Growing concerns link financial development to environmental sustainability challenges.
- Increasing carbon dioxide (CO2) emissions pose a significant global environmental threat.
- Understanding the financial sector's role in CO2 emissions is vital for policy-making.
Purpose of the Study:
- To investigate the impact and causal relationship between financial development and CO2 emissions.
- To analyze these dynamics in five major polluting countries between 1990 and 2019.
- To identify asymmetric effects and country-specific transmission channels.
Main Methods:
- Quantile-on-quantile regression analysis.
- Nonparametric causality-in-quantile methodologies.
- Analysis of financial market and institution development impacts on CO2 emissions quantiles.
Main Results:
- Financial institutions and market development significantly impact CO2 emissions.
- Asymmetric shocks and nonparametric causality exist from financial development to CO2 emissions.
- Country-specific effects observed: India (positive/negative shocks), China/USA/Russia/Japan (negative shocks from institutions); USA/Russia/Japan (positive/negative shocks from markets), China/India (negative shocks from markets).
Conclusions:
- Financial development's influence on CO2 emissions is complex and country-dependent.
- Recommendations include prioritizing environmentally conscious financial products and mitigating positive shocks.
- Enhancing the financial system's capacity for sustainable practices is essential for environmental mitigation.
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