New evidence on the finance energy and environment nexus in developed developing and emerging countries

Financial development is frequently cited as an important driver of energy consumption and CO2 emissions in all countries. Therefore, it is likely that financial development affects CO2 emissions and energy use. Using cross-country panel data for the period 1990–2020, this study examines the impact of financial development on energy consumption and carbon emissions and energy consumption on financial development. Applying seemingly unrelated regression (SUR), dynamic model two-step generalized method of moments, and the two-step system generalized method of moments approaches, it is found that financial development discourages energy consumption in developing and emerging countries, whereas the opposite is true for developed countries. Furthermore, lowered energy consumption spurs financial development in all countries, although this effect is insignificant in emerging countries. In addition, financial development decreased CO2 emissions in all sampled countries, but higher energy consumption led to higher CO2 emissions, implying little decoupling. This study specifically suggests that the financial sector of developed countries should play a role and take preventive measures to protect the environment by promoting environmentally friendly projects. The empirical results have several essential policy implications.