Carbon dioxide emissions and the finance curse

The paper empirically examines whether a country's financial sector influences carbon dioxide (CO₂) emissions for a sample of advanced and developing countries during the period 1989–2013. It first considers financial sector development and finds that a better functioning of financial system raises and then reduces CO₂ emissions with financial deepening. We then investigate whether financial structure, i.e., the dominance of stock markets over banks, matters and find that a more market-led (bank-led) financial system alleviates (enhances) but eventually aggravates (lowers) CO₂ emissions. We also check for market power in banking and show that CO₂ emissions decrease with bank market power up to a threshold level beyond which a less competitive, more concentrated banking sector raises CO₂ emissions. Next, we examine whether there are differences between household credit and enterprise credit and find irrelevance of credit composition. Bank lending to households or enterprises raises CO₂ emissions up to a threshold above which more lending is associated with less CO₂ emissions. It is also found that these effects work in part through the green technology channel. Our data thus suggest that financial reforms toward development of a more competitive, less concentrated bank-based financial system are conducive to better environmental quality.