Financial Development, Renewable Energy and Carbon Emissions: The Role of Institutional Quality

Abstract

Amidst the pressing global concern of climate change, efforts are being made worldwide to mitigate the risks associated with climate change by switching to alternative cleaner energy sources under the supervision of strict regulatory authorities paving the path to sustainability. This study explores the intricate relationships of financial development, renewable energy, institutional quality, and their joint effect on carbon emissions by using panel data from diverse geographical locations i.e. across the globe and for the continents of Asia, Africa, and Europe from 1990 to 2020. The robust theoretical framework followed by an empirical analysis employing econometric techniques of pooled OLS, fixed and random effects, and then a two-step System GMM uncover the dynamic interaction among variables and their influence on environmental quality. The results reveal that financial development exacerbates environmental quality in the form of increased carbon emissions in all regions except Europe while renewable energy consumption and institutional quality result in the upgradation of the environment. The moderation effect of institutional quality sheds light on how institutional reforms can aid in shaping financial institutions by redirecting their investments to green growth projects curbing carbon emissions and leading to sustainable development across the globe and continents. The findings in this study can be used as a road map by policymakers, businesses, and researchers to design and implement effective policies that align with global sustainability development goals. Keywords: Financial development, Renewable energy consumption, Institutional Quality, Carbon emissions. System GMM