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Does financial inclusion impact CO2 emissions? Evidence from Asia

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  • Le, Thai-Ha
  • Le, Ha-Chi
  • Taghizadeh-Hesary, Farhad

Abstract

This study examines the impact of financial inclusion on CO2 emissions using a sample of 31 Asian countries during the period 2004–2014. Three composite indicators for financial inclusion are constructed using principal component analysis (PCA) based on normalized variables. To estimate the model, we adopted the Hoechle (2007) procedure which produces Driscoll-Kraay standard errors for linear panel models that are not only heteroskedasticity consistent but also robust to general forms of cross-sectional dependence. We find that income, energy consumption, industrialization, urbanization, FDI and financial inclusion appear to have led to higher emissions of CO2 in the region. Meanwhile, increased openness to trade seems to have reduced CO2 emissions. The findings are qualitatively robust to different proxies of financial inclusions and reasonable modifications to specification of the model. The empirical results imply that there are currently no policy synergies between growing financial inclusion and mitigating CO2 emissions. Thus, financial inclusion should be integrated into climate change adaptation strategies at local, national and regional levels, especially to address the side effect of higher CO2 emissions associated with improved financial inclusion.

Suggested Citation

  • Le, Thai-Ha & Le, Ha-Chi & Taghizadeh-Hesary, Farhad, 2020. "Does financial inclusion impact CO2 emissions? Evidence from Asia," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s1544612319314345
    DOI: 10.1016/j.frl.2020.101451
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    More about this item

    Keywords

    Financial inclusion; Climate change; CO2 emissions; Panel data analysis; Asia;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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