Financial development and carbon emissions in Sub-Saharan Africa

Abstract

This study analyzed the nexus between financial development (FD, and its key dimensions), economic growth, and carbon dioxide (CO₂) emissions for 37 Sub-Saharan African (SSA) countries from 2000 to 2016. The data sources include the world development indicators, the IMF financial development, and the Maddison Project databases. The empirical strategy involved checking for cross-sectional dependence, causality, and regressions analysis using second-generation analytical techniques. The regression analysis technique was the pooled mean group ARDL estimator. The dynamic generalized method of moment estimator was used to provide robustness checks. The findings indicate that overall FD reduces CO₂ emissions in the region and supports the environmental Kuznets curve (EKC) hypothesis. Specifically, the results reveal that a 1 unit increase in the overall FD index results in a 2.867% reduction in CO₂ emissions over the long run. The coefficient of the speed of adjustment is found to be approximately negative 41% and statistically significant, which suggests that approximately 41% disequilibrium in carbon emissions is adjusted back to long-run equilibrium within a year. The Granger causality test indicates a bi-directional causality between FD and CO₂ emissions. Additional research of the critical financial subsectors for low-carbon growth suggests that the financial market index, including its access and efficiency dimensions, has a considerable CO₂ emission reduction effect. On the other hand, the financial institution index has no discernible effect, even though its access and depth dimensions contribute to CO₂ emission reductions.

Keywords: Carbon dioxide emissions; Dynamic GMM; Financial development index; Financial institution index; Financial market index; Panel ARDL; Pooled mean group; Sub-Saharan Africa.