Relationship between financial inclusion and carbon emissions::International evidence

Abstract

The nexus between financial inclusion and carbon emissions is becoming an increasingly important topic, given the augmented awareness of the negative impacts of climate change and carbon emissions on the environment and human health. In this study, we examine the impact of financial inclusion on carbon emissions using the STIRPAT framework for 102 countries from 2004 to 2020. We measure financial inclusion as a composite index, using principal component analysis (PCA) from five financial inclusion proxies. Our robust panel regression estimations suggest an N-Shaped relationship between financial inclusion and carbon emissions. The N-shaped Environmental Kuznets Curve (EKC) implies that the impact of financial inclusion on carbon emission is nonlinear and changes from an inverted U-shaped to a U-shaped. This finding is strong in developing countries and weak in advanced countries. It is also robust across our two normalized measures of financial inclusion as well as across different estimation techniques. These findings suggest adapting a universal environmental strategy that enhances financial inclusion through strong and accessible financial systems, particularly for low-income countries. Our results further suggest that government authorities and policymakers need to develop well-directed and inclusive financial policies that consider the varying levels of governance, regulations, and income across countries.