Green finance or carbon trap? The role of financial development in Ghana’s CO₂ emissions

Purpose – This study examines the symmetric and asymmetric effects of financial development on CO₂ emissions in Ghana, incorporating the roles of natural resource rents and economic sustainability. Design/Methodology/Approach – Using annual data from 1990 to 2020, the study employs linear and nonlinear autoregressive distributed lag (ARDL and NARDL) models to assess long- and short-term relationships. Principal Component Analysis (PCA) is applied to construct an economic sustainability index. Findings – The results confirm a long-run relationship between financial development and CO₂ emissions. Financial development and natural resource rents contribute to increased CO₂ emissions, whereas economic sustainability reduces emissions. The NARDL model reveals asymmetric effects: positive shocks in financial development significantly increase emissions, while negative shocks have a neutral impact. Short-term effects suggest that financial development also drives emissions growth. Research Implications – The findings underscore the need for policies that promote financial development aligned with environmental sustainability. Policymakers should incentivize green financing, strengthen environmental regulations for resource extraction, and integrate sustainability into economic policies to mitigate emissions. Originality/Value – This study is among the first to explore the asymmetric impact of financial development on CO₂ emissions in Ghana, while also considering natural resource rents and economic sustainability. By highlighting the nonlinear effects, the research provides new insights for policymakers and scholars examining the environmental consequences of financial sector expansion.