Wijerathna W.A.I.D.1 and Dharmarathna D.G.2
1,2Department of Accountancy and Finance,
Faculty of Management Studies, Sabaragamuwa University of Sri Lanka, Belihuloya 70140, Sri Lanka
DOI : 10.57075/jaf1012301
This study analyses the effect of financial development on Carbon (CO2) emissions globally. The World Bank classification of income levels and geographical regions, including 144 countries for the 1980-2019 period, were considered. Newly introduced broad-based financial development indexes of the International Monetary Fund (IMF), i.e., financial development index, financial market index, and financial institutions index and metric tons per capita of CO2 emission extracted from World Development Indicators (WDI) used to measure the financial development and CO2 emission respectively. Panel cointegration tests were employed flowed by the panel unit root tests to reveal the long-run relationship of the variables, and Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimators were employed to investigate the long-run impact. The significant positive long-run relationship of the financial development on CO2 emission is confirmed globally. In addition, financial institutions showed higher significant long-run coefficients relative to the financial market index. The financial institutions index showed a significant impact on emissions, and it is a key cause for the positively significant impact of the aggregate financial development index. Hence, transferring to green products, services, and technologies while lowering carbon footprints is crucial in financial institutions. In addition, the adoption of digital platforms to facilitate the customers would be much worthier as it widely caused the improvement of Ecological Footprints (EFP) by lowering the actual interactions by providing a virtual interface. The information necessities of the environmentalists, economists, and regulatory agencies were facilitated through the findings to enable robust strategic decision-making processes and financial, economic, and environmental policy coherence.
Keywords: Carbon emission, IMF financial development indexes, FMOLS, DOLS