Nexus Between Green Financing and Carbon Emissions: Does Increased Environmental Expenditure Enhance the Effectiveness of Green Finance in Reducing Carbon Emissions?

Martin Kamau Muchiri (), Szilvia Erdei-Gally and Maria Fekete-Farkas
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Martin Kamau Muchiri: Doctoral School of Economics and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1., 2100 Gödöllo, Hungary
Szilvia Erdei-Gally: Institute of Technology, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1., 2100 Gödöllo, Hungary
Maria Fekete-Farkas: Institute of Agricultural and Food Economics, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1., 2100 Gödöllo, Hungary

JRFM, 2025, vol. 18, issue 2, 1-22

Abstract: This study investigates the nexus between green financing (GB) and carbon emissions across 29 countries distributed worldwide with full data on green financing measured as the sum of bonds issued for the period 2018–2021. GDP per capita, population, and environmental expenditure (EP) are used as control variables in the study. An interaction term between GB and EP is also included in the study. This study utilized the Panel Robust Fixed Effect Model (PRFEM) to investigate the nexus between green financing and carbon emissions and how EP enhances the effectiveness of green financing in reducing carbon emissions. The study concludes that green finance is effective in reducing carbon emissions; this relationship remains the same regardless of country-specific factors such as the GDP per capita, EP, and population. Increases in environmental protection (EP) expenditure promote the effectiveness of green financing in reducing carbon emissions. This study recommends policies that promote the green transition including tax exemptions for investors in green bonds, the enactment of rules and regulations that require companies and institutions to provide information about their green projects, and lastly, the establishment of standards that help in measuring the impacts of the projects that are being funded through green bonds. The synergic potential between EP and green financing justifies the need for policies supporting the collaboration of public and private collaboration in attracting green capital flows from the private sectors. By enhancing the green bond market, these steps will contribute toward realizing low carbon economy goals by channeling funds to sustainable and environmentally friendly projects.

Keywords: green financing; carbon emissions; gross domestic product (GDP); population; environmental protection expenditure; panel robust fixed effect model (PRFEM) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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