The role of financial sector in energy demand and climate changes: evidence from the developed and developing countries

This paper searches the role of financial sector development in energy sector and therefore in climate changes in the case of developing and developed countries. Panel data ranging from 1960 to 2014 on an annual basis has been selected from 176 countries. Results suggest that carbon dioxide emissions in developed and developing countries are in long-term equilibrium relationship with financial sector; trade and finance sectors have long-term significant impacts on carbon emissions and therefore carbon emissions converge to their long-term equilibrium levels through the channels of finance and trade sectors. Impulse response analyses proved that finance and trade sectors have negative (reducing) impact on the emission levels in the case of developed economies while they have positive impact in the case of developing economies. These sectors exert significant effects on energy consumption of countries as well. Results confirm that developed countries are more successful in energy conservation policies compared to developing countries. Therefore, authorities in developing countries need to implement conservation policies effectively by mainly encouraging and supporting investments in alternative energy uses in order to prevent increases in emission levels through expansion in financial and trade sectors.