Environmental Energy and Economic Research

Environmental Energy and Economic Research

The Role of Financial Development in Environmental Pollution and Climate Change

Document Type : Research Article

Authors
Department of Economics, Yazd University, Yazd, Iran
Abstract
Climate change constitutes one of the pressing challenges confronting contemporary human society. Financial development possesses the potential to significantly contribute to the alleviation of environmental pollution and the mitigation of climate change by fostering economic growth predicated on sustainable energy sources. Nevertheless, a definitive academic consensus regarding the impact of financial development on environmental pollution remains elusive, and a small number of empirical investigations have scrutinized its direct repercussions on climate change. Consequently, the current study elucidates the impact of financial development on environmental pollution and climate change by employing a more comprehensive definition of financial development that incorporates four distinct indicators across two dimensions (banking and stock market) and two levels (flow and stock). Empirical data were gathered from 106 countries categorized as developed, developing, and least-developed over the period 1990–2021. Subsequently, the pollution and climate change models were estimated independently employing a dynamic panel data methodology through GMM estimator. The findings revealed that the advancement of the banking sector exerts a positive effect on environmental pollution and mean temperature. The progression of this sector, through the reduction of financing costs, the proliferation of polluting industries, and the wealth effect on the economy, has precipitated environmental deterioration. Furthermore, the positive effect of stock market maturation on pollution and mean temperature suggests that publicly traded polluting entities persist in investing in environmentally detrimental projects or in utilizing antiquated and polluting technologies, without concern for reputational harm or potential depreciation in market value.
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