Carbon dioxide emissions, financial development and political institutions

The paper empirically examines whether and how political institutions shape the nexus between finance and carbon dioxide (CO₂) emissions. In a sample of developing and developed countries, it finds that financial development impedes green technology development and thus raises energy use and CO₂ emissions, the effects that moderate with improvements in institutional quality. Despite so, there are differences between banks and stock markets, banking competition and concentration, and household and firm credit. Specifically, a more concentrated, less competitive bank-based financial system that lends more to households hinders green technology development and exaggerates energy use and CO₂ emissions, and the impacts diminish when institutional quality enhances. Conversely, a more market-oriented financial system with a more competitive and less concentrated banking sector that lends more to private non-financial enterprises promotes green technology development and decreases energy use and CO₂ emissions, the effects that weaken when the quality of political institutions betters.