The role of financial development on carbon emissions in Sub-Saharan African countries in a nonlinear framework

Financial market development on carbon emission has generated inconclusive findings, and one of the reasons could be the nonlinear relationship between them. Using the System Generalized Method of Moments approach, this paper examines the influence of financial development on carbon emissions in 29 Sub-Saharan African countries between 1994 and 2018. Results indicate that initial financial development increases carbon emissions while further advancement reduces them, supporting the Kuznets curve hypothesis of an inverted U-shaped relation between growth and environmental degradation. The preferred model identifies a financial-development threshold of approximately 0.973 in log terms (about 2.65 in level terms), after which the marginal effect of financial development on carbon emissions becomes negative, although the affluence results remain unstable across specifications. The control variables, such as population growth and energy consumption, exhibit positive and significant effects on carbon emissions, while the affluence shows inconsistent effects. The findings suggest that Sub-Saharan African countries should link financial deepening with concrete green-finance measures, including green credit guidelines for banks, concessional loans for renewable-energy projects, reduced import duties on solar and energy-efficient technologies, and environmental risk screening in credit approval. These actions can help prevent early-stage financial development from financing carbon-intensive activities while strengthening the emission-reducing role of advanced financial systems.