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Does financial development cause environmental pollution? Empirical evidence from South Asia

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Abstract

This study explores the influence of financial development (FD) on CO2 emissions in five South Asian economies including energy consumption (ENC) and per capita income (PCI) as control variables. Using annual panel data for the period 1980–2018, this study applies the second-generation unit root and cointegration tests, panel pooled generalized least square (GLS) estimate, pooled mean group (PMG) estimation, and Dumitrescu-Hurlin panel causality test to accomplish the study. Westerlund cointegration test confirms a long-run relationship among the variables. The GLS estimation results reveal that FD, ENC, and PCI have significant impacts on environmental pollution. The relationship between FD and CO2 emissions is linear, and thus, FD causes environmental pollution positively; an increasing level of FD does not reduce the latter. PCI and ENC affect environmental quality negatively. However, the existence of the EKC hypothesis is validated, as, at a rising level of PCI, pollution starts declining, taking an inverse U-shape. The PMG estimators also provide similar outcomes and validate the robustness of the panel GLS estimation. The D-H causality test supports the GSL findings and further reveals a feedback relationship between PCI and CO2 emissions, ENC causes CO2 emissions, bidirectional causality exists between FD and ENC, PCI causes both ENC and FD, and CO2 emissions cause FD. The outcomes have implications for the policymakers to encourage firms and stakeholders to invest in renewable energy projects, and the financial intermediaries to the extent and subsidize loans for such investment projects. This is likely to induce investments in renewable energy sources, which will boost the energy portfolios, reduce CO2 emissions, and produce a moderately cleaner environment.

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Data availability

Data is taken from the following two websites: https://databank.worldbank.org/source/world-development-indicators# and https://data.imf.org/?sk=f8032e80-b36c-43b1-ac26-493c5b1cd33b.

Notes

  1. The eight countries of SAARC include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

  2. FD index is a composite index of countries’ comparative ranking on the depth, access, and efficiency of their financial institutions and financial markets.

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  1. Department of Economics and Finance, College of Business Administration, University of Hail, P.O. Box 55476, Hail, Kingdom of Saudi Arabia

    Md. Saiful Islam

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Islam, M.S. Does financial development cause environmental pollution? Empirical evidence from South Asia. Environ Sci Pollut Res 29, 4350–4362 (2022). https://doi.org/10.1007/s11356-021-16005-8

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