Financial Development and CO2 Emissions in Emerging Markets: Evidence from Dynamic Panel Regression Models

Abstract This study examines the dynamic relationship between financial development and CO2 emissions in BRICS and Non-BRICS emerging markets from 2000 to 2022. The study also considers the role of energy consumption, economic growth, trade openness, and foreign direct investment in the relationship between financial development and CO2 emissions. Based on a sample of 22 emerging markets and Germany, we provide evidence that financial development and CO2 emission are cointegrated. Also, economic growth and energy consumption are the main drivers of CO2 emission in the short run, while financial development, energy efficiency, economic growth foreign direct investment all have a positive effect on CO2 emissions in the long run. However, trade openness reduces CO2 emissions in the long run. Further, we find that all, except energy consumption, are significant explanatory factors for financial development in the long run. Besides, there is evidence that unobserved country-specific factors are significant determinants of both financial development and CO2 emissions. However, while all the BRICS countries have positive country-specific effects, most African countries are associated with negative unobserved country-specific effects. Hence, the scope of global and regional environmental policies and interventions can be expanded to accommodate country idiosyncrasies for better and more dependable results. JEL: F65, Q56, C23.