Finance and Green Growth
70 Pages Posted: 12 Jul 2018 Last revised: 7 Jan 2021
Date Written: July 12, 2018
We study how countries' financial structure affects their transition to low-carbon growth. Using global industry-level data, we document that carbon-intensive industries reduce emissions faster in economies with deeper stock markets. Two channels underpin this stylized fact. First, stock markets reallocate investment towards energy-efficient sectors. Second, in countries with deeper stock markets, carbon-intensive sectors engage in more green innovation, resulting in lower carbon emissions per unit of output. Only one-tenth of these industry-level reductions in domestic emissions are offset by carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equity in Belgium confirms our findings.
Keywords: Financial development, industrial pollution, innovation, reallocation.
JEL Classification: G10, O4, Q5.
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