The impact of financial development on CO2 emissions: new evidence from developed and emerging countries

Taking into account the complicated and multidimensional nature of financial development, this study aims to investigate the impact of overall financial market development, institution development, and their sub-indices on CO2 emissions. To advance knowledge about the nexus between financial development and CO2 emissions, four financial market indices (overall financial market development, FM-access, FM-depth, and FM-efficiency) and four financial institution indices (overall financial institution development, FI-access, FI-depth, and FI-efficiency) are used. The study used two-stage system GMM and panel data of developed and emerging countries over the period 2000-2018. The empirical results reveal that the overall financial market development and its sub-indices (FM-access, FM-depth, and FM-efficiency) reduce CO2 emissions in developed and emerging countries. The results further show that the overall financial institution development and its sub-indices such as FI-access, FI-depth, and FI-efficiency foster the environment quality in developed economies, while these indices impede the environmental quality in emerging economies. The usage of renewable energy is found to be a viable solution to mitigate the CO2 emissions in both groups of countries. Additionally, policies related to sustainable development are also discussed in the paper.