Finance and Carbon Emissions

Abstract

We study the relation between financial structure and carbon emissions in a large panel of countries and industries. For given levels of

economic and financial development, emissions per capita are lower in economies that are relatively more equity-funded. Industry-level analysis reveals two channels. First, deeper stock markets reallocate investment towards cleaner industries and, second, they allow carbon-intensive industries to produce green patents and reduce their energy intensity. Only one-tenth of these industry-level reductions in domestic emissions is offset by increased carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equity in Belgium confirms our findings.

Keywords: Carbon Emissions, Financial Development, Financial structure, Innovation

JEL Classification: G10, O4, Q5