cover image: Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries

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Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries

16 Oct 2024

Financial deepening contributes to economic development, but its effect on the carbon intensity of production is an open empirical question. If banks finance investments in new, greener technologies, they can contribute to lowering carbon dioxide emissions per unit of output. But if they finance investments in more traditional, carbon-intensive technologies, they can contribute to increasing carbon dioxide emissions per unit of output. This paper studies the impact of financial deepening—an increased provision of bank credit as a share of gross domestic product—on carbon dioxide emissions per dollar of gross domestic product in a global sample of 125 economies from 1990 to 2019. Using a local projections approach, the paper finds that, on average, financial deepening leads to a relative increase in carbon dioxide emissions per dollar of gross domestic product, indicating that financial institutions finance relatively more carbon-intensive investments and consumption. However, a better institutional environment mitigates this adverse effect of financial deepening: conditional local projections reveal that in countries with more environmental regulations, a stronger rule of law, and a financial system that is relatively more market- than bank-based, financial deepening does not lead to higher carbon dioxide emissions per dollar of gross domestic product. Specifically, the results show that countries with an initially lower carbon intensity of production can mitigate the average adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product by improving their general institutional environment proxied by adherence to the rule of law, and, to some extent, by developing their financial markets. By contrast, countries with an initially higher carbon intensity of production are better off focusing on environmental regulations to mitigate the unconditional adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product.
financial institutions bank credit financial deepening co2 emissions climate action environment::environmental economics & policies environment::climate change impacts environment::carbon policy and trading sdg 8 decent work and economic growth sdg 13 finance and financial sector development::financial structures carbon intensity of credit

Authors

Fisera, Boris, Melecky, Martin, Singer, Dorothe

Citation
“ Fisera, Boris ; Melecky, Martin ; Singer, Dorothe . 2024 . Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries . Policy Research Working Paper; 10948 . © Washington, DC: World Bank . http://hdl.handle.net/10986/42254 License: CC BY 3.0 IGO . ”
Collection(s)
Policy Research Working Papers
DOI
http://dx.doi.org/10.1596/1813-9450-10948
Identifier externaldocumentum
34400852
Identifier internaldocumentum
34400852
Pages
36
Published in
United States of America
RelationisPartofseries
Policy Research Working Paper; 10948
Report
WPS10948
Rights
CC BY 3.0 IGO
Rights Holder
World Bank
Rights URI
https://creativecommons.org/licenses/by/3.0/igo/
UNIT
Prosperity-FCI-TIC-Mkts
URI
https://hdl.handle.net/10986/42254
date disclosure
2024-10-16
region geographical
World

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