Relationship between energy demand, financial development, and carbon emissions in a panel of 101 countries: “go the extra mile” for sustainable development

Abstract

The objective of the study is to examine the impact of energy demand on carbon emissions in mediation of financial development and economic growth in a panel of 101 countries by using the time series data from 1995 to 2018. The study employed dynamic GMM estimator in order to reduce possible endogeneity in the given model. Further, the study used Granger causality and innovation accounting matrix (IAM) to find the causal relationships and variance error shocks between the variables. The results show that energy demand and FDI inflows increase carbon emissions, while financial development decreases carbon emissions across countries. Moreover, the results confirmed the inverted U-shaped relationship between income and emissions with a turning point of US$43,500. Among 101 countries, only 13 countries hold environmental Kuznets curve (EKC) hypothesis as their per capita income surpassed the stated turning point, while the remaining countries exhibit “race to the bottom” hypothesis. The feedback relationship is established between (i) income and carbon emissions, (ii) money supply and carbon emissions, and (iii) FDI inflows and energy demand across countries, whereas one-way linkages found in (i) carbon emissions to money supply, (ii) energy demand to money supply, (iii) money supply to FDI inflows and income, and (iv) energy demand to income across countries. The IAM analysis shows that energy demand, FDI inflows, and money supply will likely to increase carbon emissions, while money supply will decrease carbon emissions over a time horizon.