The decline in carbon intensity: the role of financial expansion and hydro-energy

The effect of a broad financial index (FD), hydro-energy output, and expansion of the economy on the intensity of carbon were investigated by incorporating the effect of financial expansion through the channel of hydro-energy. The cross-sectional autoregressive distributed lag (CS-ARDL), Mean Group (MG), Augmented Mean Group (AMG), and vector error correction mechanism causality approaches were employed to study panel data for the period from 1980 to 2017 for the top four hydro-energy producing states. The outcomes revealed that FD raises the intensity of carbon in both the short and long term. In contrast, hydro-energy output (HYP) is stated to be a significant factor for attaining a low carbon intensity in the short and long term. The outcomes also indicated that the expansion of the economy augments the intensity of carbon. However, FD lowers the intensity of carbon via the channel of hydro-energy. The causality test outcomes revealed a short-run causality moving from the intensity of carbon to hydro-energy as well as a short-term causality moving from GDP to the intensity of carbon. It was also observed that there is a long-term causality running from all the variables to the intensity of carbon. Important policy implications are suggested at the end of the research.