Finance and Green Growth

Abstract

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. The main channel underpinning this stylised fact is that stock markets facilitate green innovation in carbon-intensive sectors, resulting in lower carbon emissions per unit of output. More tentative evidence indicates that stock markets also help to reallocate investment towards more energy-efficient sectors. Cross-border spill-overs are limited: less than five percent 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