Investigating the Dynamic Relationships Among Disaggregate Components of Financial Development, Renewable Energy Consumption and Environmental Degradation

This study investigates the relationship between disaggregate components of financial development and CO 2 emissions by considering the complicated and multidimensional nature of modern financial systems across the globe. Using panel data for 46 Sub Saharan Africa countries ranging from 1991 to 2016, we adopt the dynamic generalized-method-of moment system (sys-GMM) model to investigate the aforementioned objective of the study. The empirical results show that the development of financial market and its sub-measures such as financial market access, depth and efficiency further raise CO 2 emissions in the region. The similar impact is found for the development of financial institution and its sub-measures. However, the development of financial market has a smaller impact on CO 2 emissions compared to the development of financial institution. The results further reveal that renewable energy consumption reduces CO 2 emissions significantly. An increasing role of financial markets complement renewable energy to improve the quality of the environment. The study also reveal that the relationships among these variables and CO 2 emissions vary across countries due to different level of economic development. The policy implications are also discussed in the current study.

Over the years, environmental degradation and global warming have become a major concern for 3 nations around the world and important debatable global issues. The greenhouse gasses emissions 4 are considered the major cause of environmental changes. Among other emissions of greenhouse 5 gasses, carbon dioxide (CO2) contributes 75% of total pollutants (Amin et al., 2020). The main 6 cause of CO2 emissions is increased use of conventional energy sources such as coal, gas and oil 7 that negatively affects the environment and health of human beings. It is reported that polluting 8 energy sources account for around 68% of CO2 emissions (International Energy Agency, 2019). 9 Thus, mitigation of CO2 emissions has received substantial attention of researchers and policy 10 makers because it is crucial for the policy makers to know the main driving factors of CO2 11 emissions and environmental degradation.

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One of the most viable solutions to mitigate the CO2 emissions is considered the adoption of 13 renewable energy sources while maintaining the economic growth and development of countries.
14 In this regard, many countries have started their efforts in gradual transformation of pollute energy 15 sources to clean energy sources (i-e. biomass, hydro, geothermal, solar and wind), as well as 16 improving the efficiency and conservation of energy. Therefore, the share of renewable energy in 17 total energy consumption has been increased in recent years across developed and developing 18 economies (see, Farhani and Shahbaz, 2014;Kaung et al., 2017;Baul et al., 2018;Sinha et al., 19 2018; Alizadeh et al., 2020;Praveen et al., 2020). The use of renewable energy has two main 20 advantages compared to nonrenewable energy. Firstly, renewable energy is supposed to be the 21 potential solution to control the issue of environmental degradation as it produces low CO2 22 emissions in comparison of conventional energy sources and secondly it provides high energy 23 security to meet the increasing demand for energy (Paramati et al., 2017a). Given the importance 24 of renewable energy consumption, it adoption can reduce carbon emissions and other pollutants 25 significantly. 26 Similarly, the existing literature argues that financial development also contributes significantly in 27 carbon emissions. Theoretically, scholars have two main opposing views on the relationship 28 between financial development and environmental degradation. Some scholars argue that financial 29 development deteriorate the environmental quality (Sadorsky, 2010(Sadorsky, , 2011Tang and Tan, 2014;30 Kahouli, 2017; Nasir et al., 2019). A developed financial system not only increase the efficiency 31 of a country's financial sector but also contributes to increase the economic development and 32 growth in a country. Improved financial sector makes easier access of firms to financial capital at 33 al., 2015a; Ali et al., 2019;Kayani et al., 2020) while others find opposing influence on the 48 environmental degradation (Tamazian et al., 2009;Al-Mulali et al., 2015b;Abbasi and Riaz, 2016;49 Xing et al., 2017;Gill et al., 2019). insurance companies, investment banks, venture capital firms, pension funds and mutual funds. In 59 the same way, financial markets have become advanced in many ways which enable businesses 60 and people to raise their funds and diversify savings through bonds, stocks and wholesale money 61 markets (Aizenman et al., 2015). The financial systems diversity implies that financial 62 development needs to measure through multiple indicators across economies. Therefore, to 63 overcome the limitation of a single indicator, this study uses a number of indicators for financial 64 development to better understand the relationship between financial development and CO2 65 emissions, which recently developed by International Monetary Fund (IMF) by using multi-66 dimensional approach. Secondly, some of existing studies measured financial development by 67 combining variables of stock market and financial intermediation (Zhang, 2011;Abbasi and Riaz, 68 2016 ) while most researchers used aggregate different proxies to represent financial development 69 (e.g. Boutabba, 2014;Shahbaz et al., 2018;Yao and Tang, 2020 According to the World Bank (2015), the largest proportion of people are still living below the 79 poverty line in the Sub-Saharan Africa region compared to the other world regions. The SSA 80 countries are already experiencing the adverse effects of climate change. Over the years, the 81 disasters related to weather have been increased, such as floods, heat stress and droughts which 82 have led to a reduction in food productivity and spread the diseases across Africa (Serdeczny et al. 83 2017). Furthermore, the financial sectors of SSA countries remain woefully underdeveloped 84 relative to other developing regions. Allen et al. (2013) argue that the financial sector of most of 85 the SSA countries have undergone extensive reforms in the last two decades of the same 86 proportions as other developing countries. However, the SSA countries still have the least 87 developed financial sectors relative to the standards of other developing and emerging countries.

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Therefore, it is crucial to understand the impact of disaggregate financial development and its sub- two sub-panels i-e., high-income and low-income countries to add more insights in the empirical 101 analysis. Finally, we employ a dynamic system generalized-method-of moment (sys-GMM) to 102 estimate the empirical models which helps to control the possible issues of endogeneity.

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The rest of the paper is presented as follows: Literature review is given in section 2. Section 3 104 describes the empirical models, methodology and data. The empirical findings and their 105 discussions are presented in section 4. Finally, section 5 about conclusions and policy implications.   The main aims of this article is to explore the role of financial markets and financial institutions 231 development and their sub-indices on emissions of CO2 in SSA countries. This study also 232 investigate the effect of renewable energy consumption on emissions. To achieve the 233 aforementioned objectives, we use the following models for empirical estimation: respectively. Further, we extend the equations (1) and (2)  We employ dynamic generalized-method-of moment system (sys-GMM) model over conventional GMM is known to more consistent when series are persistent, and there is a dramatic reduction in 262 the finite sample bias due to the exploitation of additional moment conditions (Blundell et al.,263 2001; Roodman, 2009). Given that these reason, we have adopted the sys-GMM estimation model 264 to deal with the potential issue of endogeneity. Moreover, to address the concerns of 265 heteroscedasticity, and to ensure the reliability of estimates, this study estimates the above 266 equations using the two-step sys-GMM.

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In this study, we use the annual data for 46 SSA countries 1 as a sample, ranging from 1991 to  and trade openness on emissions of CO2 using sys-GMM estimator. Table 3   The results further reveal that renewable energy consumption is significantly and negatively emissions at 1% level, which implies that the economic growth raises environmental degradation.

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More specifically, a 1 % raise in per capita income will reduce the quality of the environment 342 between the ranges of 0.073 to 0.069. This evidence supports the argument that when income 343 grows, consumers tend to purchase heavy vehicles which demand more energy and thus contribute

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The findings further reveal that the renewable energy consumption has a significant negative effect 475 on CO2 emissions and consistent with the findings of sub-panels for high-income and low-income 476 countries. This result implies that an increased use of renewable energy contribute to improves the 477 environmental quality in the region. In addition, the estimated interactive effects between financial 478 market development, access, depth, efficiency and renewable energy consumption reveal that 479 improvement in financial market complement renewable energy to mitigate the level of emissions. 480 We also find out that FDI inflows contribute to CO2 emissions reduction in the region. However,