Enabling financial development: linking innovation and CO2 emissions through equity and credit financing

Abstract

Over the past decade, financial development has been a prominent debate for stakeholders and policymakers alike. Financial development are prerequisites for innovation and CO₂ emissions, followed by the Paris Climate Summit (COP21). In the wake of the global economic recession, financial development continues to address CO₂ emissions efforts. However, scant attention is paid to the role of financial development in innovation and CO₂ emissions relationship, especially in the context of developing countries. The current study explores the relationship between innovation and CO₂ emissions through moderating role of financial development, especially in the context of developing countries. Utilizing a dynamic panel threshold approach, the current study utilizes data from 26 countries between 1990 and 2014. Our findings reveal that innovation positively impacts the reduction of carbon emissions when the stock market value-to-private credit ratio is below 1.71, while an opposite effect is observed when the ratio exceeds this threshold. We believe that the findings broaden the debate on financial development in developing countries. The results revealed that developing countries should allocate their domestic resources to financial development and poverty reduction, rather than solely addressing environmental concerns. In addition, a more sustainable balance between innovation and CO₂ emissions could benefit through financial development and the impact may be the result in terms of achieving sustainable development.

Keywords: CO2 emissions; Developing country; Financial development; Innovation; Threshold effect.