This study investigates the influence of financial inclusion on carbon emissions (CO2) empirically using an extended Stochastic Impacts by Regression on Population, Affluence and Technology (STIRPAT) model.
The current study has used a panel (cross-sectional time-series) dataset covering 160 countries for the period 2004–2020. The study employs a non-parametric multidimensional financial inclusion index calculated using three dimensions: access, availability and usage of financial services.
Our results suggest that financial inclusion increases carbon emissions for the total sample in the short term while reducing medium- and long-term emissions. However, the results are completely different when grouping the countries into income-based clusters. In fact, for high-income countries, the relationship follows an inverted N-shape, while for low, lower-middle and upper-middle-income groups, financial inclusion seems to increase long-term carbon emissions. Our results also suggest that renewable energy consumption and better energy productivity reduce carbon emissions for all income groups.
We discuss the practical implications of our research with respect to financial policy-making, governance and regulatory frameworks, specifically addressing how these areas are affected across countries with different income levels.
This study brings four main contributions. First, to the best of our knowledge, this is the first reported study that uses a more comprehensive multidimensional financial inclusion index. Second, it extends the STIRPAT framework by considering a broader range of control variables, including energy variables, for a broader sample and across a longer period. Third, it classifies countries based on their income levels. Fourth, it provides new insights and recommendations for policymakers, legislators and governments.
