Does good governance moderate the financial development-CO2 emissions relationship?

Abstract

This inquiry contributes to the previous literature by analyzing the empirical linkage between the development of the financial sector and carbon emissions in the presence of good governance. Specifically, we examine the ability of good governance in moderating the negative effect of financial development on environmental quality in Saudi Arabia over the period 1996-2016. Different indicators of financial development and governance quality are included in the analysis. Using the Dynamic Ordinary Least Squares (DOLS) estimator, we find (i) the exostence of unconditional effects of the three indicators of financial sector development on increasing carbon emissions in most models; (ii) the indicators of governance quality increase carbon emissions in most models; (iii) the net effects on CO₂ emissions are negative from the complementarity between the indicators of financial sector development and political and institutional governance, meaning that the development of financial sector reduces carbon emissions if it is accompanied by good institutional and political governance.

Keywords: CO2 emissions; Financial sector; Good governance.