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.