How financial development affects CO2 emissions: A spatial econometric analysis

Abstract Based on panel data from 97 countries over the period of 2000–2014, this study uses the spatial econometric model to reexamine the effect of financial development on CO2 emissions. The results indicated that there was a spatial correlation between CO2 emissions among countries during this period. More importantly, we found that a country's CO2 emissions could be influenced by the financial development of its neighbors. Specifically, the significantly negative spillover effect of financial development on CO2 emissions dominated the significant positive direct effect, thus suggesting a significant negative total effect. These findings imply that financial development plays a fundamental role in the mitigation of CO2 emissions, and that being surrounded by nearby countries with a high financial development could improve a country's environmental performance. These empirical insights are of particular relevance to policymakers as they act as a reminder of the importance of considering the influence of financial development both in a given country and in its neighboring countries.