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Investigating the role of financial development in mitigating carbon emissions across diverse financial economies

Author

Listed:
  • Su-Yin Cheng

    (Shih Hsin University)

  • Chih-Ping Yu

    (Feng Chia University)

  • Han Hou

    (Shih Chien University)

Abstract

The growing emphasis on Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) criteria has intensified interest in understanding how financial development influences carbon emissions. Theoretical and empirical literature has sparked debate on the connection between the two. Does financial development truly impact carbon emissions? This study delves into this question by incorporating three crucial dimensions. Firstly, this study adopts a comprehensive measure of financial development, encompassing the depth, efficiency, and accessibility of both financial institutions and markets. Secondly, this paper examines how these relationships vary across different levels of financial development. Thirdly, through employing the pooled mean group (PMG) methodology, this paper investigates these relationships while allowing for short-term adjustments. Using panel data from 82 countries covering the period 1990–2019, the findings reveal that countries with advanced financial systems can reduce carbon emissions by improving access to financial markets. In contrast, countries with lower financial development can achieve reductions by enhancing financial institution accessibility and financial market efficiency. For countries in the moderate stage of development, improving access to financial institution services alone can lower emissions. Overall, the findings suggest that a country's capacity to enact effective policies within its financial system to reduce carbon emissions hinges on its level of financial development.

Suggested Citation

  • Su-Yin Cheng & Chih-Ping Yu & Han Hou, 2025. "Investigating the role of financial development in mitigating carbon emissions across diverse financial economies," Economic Change and Restructuring, Springer, vol. 58(1), pages 1-31, February.
    • Handle: RePEc:kap:ecopln:v:58:y:2025:i:1:d:10.1007_s10644-025-09855-6
    DOI: 10.1007/s10644-025-09855-6
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    More about this item

    Keywords

    Carbon emissions; Financial development; Financial institution; Financial market; SDGs; ESG;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F30 - International Economics - - International Finance - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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