The asymmetric relationship between financial development and CO 2 emissions: the case of Pakistan
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The asymmetric relationship between financial development and CO2 emissions: the case of Pakistan Muhammad Tariq Majeed1 · Isma Samreen1 · Aisha Tauqir1 · Maria Mazhar1 Received: 31 December 2019 / Accepted: 30 March 2020 © Springer Nature Switzerland AG 2020
Abstract The role of financial development for the environment has been extensively debated but the empirical results largely remain inconclusive. Empirical studies generally assume symmetric relationships, which can produce biased results. This study investigates the role of asymmetries in shaping the relationship of financial development (FD) with the environment by employing nonlinear autoregressive distributed lag (NARDL) model over the period 1972–2018. The structural unit root test of Zivot and Andrews indicates that all variables are integrated of order one and bound tests confirm long run relationship between the variables. The results validate the asymmetric association between FD and the environment as CO2 emissions are largely affected by negative shocks in FD in the short and long run. The dynamic multiplier analysis also supports the results by showing the dominance of a higher impact of a negative component of FD on carbon emissions than a positive component. This study concludes that assuming the symmetric effect of FD on CO2 emissions might be misleading. The study suggests that the policy makers may strive to achieve high growth rates using environmentally friendly financial development. Moreover, the negative asymmetric impact of FD needs to be considered in the development of financial sector. Keywords Financial development · Economic growth · NARDL · Energy use · Zivot and andrews
1 Introduction Economic policies are largely focused on achieving high and sustained growth rates. However, prioritizing growth rates also adversely affects the ecosystem services. Increasing energy use along with increasing economy’s growth can lead to higher air and water pollution, loss of biodiversity and global warming. Among all greenhouse gases, C O2 emission is considered as serious threat to the environment as it comprises almost 75% of total greenhouse gass [1, 2]. There are various causes of high carbon emissions such as population growth [3], financial development (FD) [4], energy consumption, urbanization and trade openness [5, 6].
From the last few years, the relationship between FD and environmental quality has become important with the expansion of green financing. Green financing helps to control the growth of carbon emissions by facilitating climate friendly and carbon-reducing projects. Moreover, FD decreases the level of CO2 emissions by providing the research and development projects, introducing new and environmentally friendly technologies, and by facilitating financial and technical assistance to firms [7, 8]. Whereas, FD can also pollute the economies by damaging the ecosystem services. Because the extensive use of energy for production leads to higher CO2 emissions, depletion of natural resources and health related issues [9–12
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