Green Finance, Carbon Emissions, and Economic Growth: A PanelData Analysis of Developing Countries

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Original abstract

Green finance has emerged as a strategic policy instrument in the quest to reconcile economic development with environmental sustainability, especially in developing countries, where the impact of increasing carbon emissions is felt amidst the backdrop of industrialization, urbanization and growing energy needs. This study applies yearly panel data of selected developing countries for the period 2010-2023 to investigate the relationship of interdependence between green financing and carbon emissions with economic development. This study applies different panel econometric techniques such as descriptive statistics, correlation analysis, pooled ordinary least square (POLS), fixed and random effects models, Hausman specification testing, panel autoregressive distributed lag (ARDL)/PMG estimation and robustness check with FMOLS/DOLS. Carbon emissions are measured by CO₂ emissions, economic development is measured by GDP growth or real GDP per capita while green finance is measured by issuing of green bonds, issuance of green credit (investment in renewable energy), or a composite measure (e.g., index of subsidies to fossil fuels, investments in renewable energy). Empirical results show that on a large scale, green finance policy can reduce carbon emissions and promote economic development. The use of clean energy reduces emissions and reduces the statistical elasticity of the growth of GDP to CO2 emission. But trade liberalization, foreign direct investment, urbanization and energy use may all contribute to increased emissions in the absence of strong environmental regulation. The research shows that sustainable development can be achieved by developing green financial markets, mobilizing renewable energy investment and improving environmental governance in developing countries.

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