Emissions effect of financial development in the GCC: is the effect asymmetric?

Abstract Obviously, financial development is one of the factors to consider in designing climate policies. We investigated the effects of financial development on co 2 emissions alongside income, total factor productivity, and international trade in Gulf Cooperation Council (GCC) countries. Ignoring common factors can lead to erroneous findings and misleading policy recommendations. The same consequences occur if the nature of a factor’s effects is incorrectly considered. Hence, the Asymmetric Pooled Mean Group augmented with common unobserved factors—a cutting-edge method allowing for the discovery of not only the features of the pooled panel but also the characteristics of each country—was applied to data from 1992 to 2021. Additionally, we accounted for key properties of the panel time series data—cross-sectional dependence, non-stationarity and heterogeneity. To our knowledge, there is no such application for GCC countries, and only one internationally. In designing climate policy measures, a few key findings of our research are worth considering. (i) policies should account for factors common to GCC countries, as ignoring them makes co 2 effects of financial development misleading. (ii) an upturn in financial development leads to less emissions than a downturn in it. This asymmetric effect implies that policies should boost financial development. (iii) co 2 in GCC countries may converge to an identical relationship in the long run implying that there are common climate initiatives and projects that GCC authorities should work on jointly.