An empirical investigation of financial development and carbon emissions nexus: insights from Asia’s leading economies

Purpose This study investigates the impact of financial development (FD) on CO2 emissions in five major Asian economies – China, India, Japan, South Korea and Indonesia over the period 1995 to 2020, while controlling for economic growth, human capital (HC) and urbanization. Design/methodology/approach Cross-sectional dependence is tested using the Lagrange Multiplier (LM) test, followed by second-generation unit root tests. Pedroni's panel cointegration and Westurlund test confirm long-run relationships. The Panel Mean Group estimator under the Panel Autoregressive Distributed Lag (ARDL) framework is used for coefficient estimation, while Dynamic Ordinary Least Squares (DOLS) ensures robustness. Dumitrescu–Hurlin Granger causality test assesses short-run causal links. Findings The study finds that FD reduces CO2 emissions by 1.13% in the long run, with an insignificant short-run effect of 0.16%. Economic growth increases emissions by 11.00%, while the squared term of 0.47% supports the Environmental Kuznets Curve (EKC) hypothesis. HC lowers CO2 emissions by 2.59% in the long run and 12.05% in the short run. Urbanization raises emissions by 3.01% in the long run, with a statistically insignificant short-run effect −3.48%. Granger causality reveals unidirectional links from FD and economic growth to emissions. DOLS estimates confirm the robustness of long-run relationships. Cross-sectional ARDL results show mixed short-run effects across countries. Practical implications The results indicate the importance of financial systems, HC and urbanization in reducing emissions. Green finance, environmental education and sustainable urban planning are key to climate-smart growth in leading Asian economies. Originality/value This study uses multiple estimators to robustly confirm FD's role in reducing CO2 emissions, validates the EKC and highlights the dynamic roles of HC and urbanization in reducing CO2.