Investigating the role of financial development in mitigating carbon emissions across diverse financial economies

Su-Yin Cheng (), Chih-Ping Yu () and Han Hou ()
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Su-Yin Cheng: Shih Hsin University
Chih-Ping Yu: Feng Chia University
Han Hou: Shih Chien University

Economic Change and Restructuring, 2025, vol. 58, issue 1, No 11, 31 pages

Abstract: Abstract The growing emphasis on Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) criteria has intensified interest in understanding how financial development influences carbon emissions. Theoretical and empirical literature has sparked debate on the connection between the two. Does financial development truly impact carbon emissions? This study delves into this question by incorporating three crucial dimensions. Firstly, this study adopts a comprehensive measure of financial development, encompassing the depth, efficiency, and accessibility of both financial institutions and markets. Secondly, this paper examines how these relationships vary across different levels of financial development. Thirdly, through employing the pooled mean group (PMG) methodology, this paper investigates these relationships while allowing for short-term adjustments. Using panel data from 82 countries covering the period 1990–2019, the findings reveal that countries with advanced financial systems can reduce carbon emissions by improving access to financial markets. In contrast, countries with lower financial development can achieve reductions by enhancing financial institution accessibility and financial market efficiency. For countries in the moderate stage of development, improving access to financial institution services alone can lower emissions. Overall, the findings suggest that a country's capacity to enact effective policies within its financial system to reduce carbon emissions hinges on its level of financial development.

Keywords: Carbon emissions; Financial development; Financial institution; Financial market; SDGs; ESG (search for similar items in EconPapers)
JEL-codes: C33 F30 G22 O16 O43 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10644-025-09855-6

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