Exploring environmental degradation spillovers in Sub-Saharan Africa: the energy–financial instability nexus

This paper explores the macro-financial externalities of environmental degradation in Africa. Specifically, we examine whether and how changes in non-renewable and renewable energy consumption affect financial instability in 35 sub-Saharan African (SSA) countries. We use an original econometric approach based on panel logit-probit models, as well as the bootstrap inference method for quantile regressions to explore the occurrence of systemic banking crises, as an indicator of extreme financial instability (from 1990 to 2018), and the quantile function of the banking sector stability index (Z-score), as a measure of different levels of banking instability (from 1990 to 2021). Empirical results support the climate fragility hypothesis by indicating that an increase in non-renewable and renewable energy consumption leads to a higher probability of systemic banking crises and a decrease in banking stability, especially in the lower quantiles (extreme instability). These results are mainly explained by the transition and physical risks in SSA related to climate change.