Impact of financial development on CO2 emissions: improved empirical results

This study analyzes the impact of financial development on CO2 emissions in 24 selected countries over the period from 1970 to 2014. The primary task of this study is to investigate whether financial development encourages or reduces CO2 emissions. The application of a modern and more powerful econometric approach generates results that undoubtedly indicate positive long-term impact of financial development on CO2 emissions. Also, there are empirical indications that the long-term impact of domestic credit provided by the financial sector is most likely both direct and indirect, while the long-run effect of domestic credit to the private sector and domestic credit to the private sector by banks is most likely indirect one. The obtained results suggest that economic policy measures should be focused on stimulating loans to finance: (i) investments in more energy-efficient technology that enables the transition to cleaner energy sources, especially in the energy, manufacturing and transportation sectors; (ii) transition to low-emission engines and later to gas-powered vehicles, as well as hybrid and electric vehicles; (iii) research and development projects that should enable reduction of CO2 emissions and use of this gas as a feedstock; (iv) gasification of households.