The Impact of Financial Deepening Indices on CO2 Emissions: New Evidence from European and Sub Saharan African Countries

Abstract

Taking into account the complicated and multidimensional nature of financial development, this study aims to investigate the impact of overall financial markets development, institutions development, and their sub-indices on CO2 emissions. To advance knowledge about the nexus between financial development and CO2 emissions, four financial markets indices (overall financial markets development, FM-access, FM-depth and FM-efficiency), and four financial institutions indices (overall financial institutions development, FI-access, FI-depth and FI-efficiency) are used. The study uses two-stage System-GMM and panel data of 41 EU and 43 SSA countries over the period 2000-2018. The empirical results reveal that the overall financial markets development and its sub-indices (FM-access, FM-depth and FM-efficiency) reduce CO2 emissions in the EU countries. However, for SSA countries, the degrading effect is found. The results further show that the overall financial institutions development and its sub-indices such as FI-access, FI-depth and FI-efficiency foster the environment quality in the EU region while overall financial institutions development and FI-access impede in the SSA region. The estimated effect of FI-depth and FI-efficiency is not significant in the case of SSA countries. The usage of renewable energy is found a viable solution to mitigate the CO2 emissions in both group of countries. The current paper also suggest important sustainable development policies.