The Impact of Financial Inclusion on CO2 Emissions

Abstract

In this study, we investigate the causal link between financial inclusion and CO2 emissions. We employ Generalized Method of Moments (GMM) and Generalized Least Squares (GLS) econometric models for a panel of 15 Latin American and 10 MENA countries during the period 2004-2018. Financial inclusion is proxied by the number of ATMs per 100,000 adults, number of commercial bank branches per 100,000 adults, outstanding deposits from commercial banks (% of GDP) and outstanding loans from commercial banks (% of GDP). This is the first study of its type to investigate this issue using data for the specific analysis of Latin America and the MENA regions. After controlling for energy supply, industry value added (% of GDP), and economic growth, and addressing the potential endogeneity and cross-sectional dependence issues, the results of our estimations are significantly different from the previous literature, and across our two regions of interest. While financial inclusion has a significant positive effect on CO2 emissions in Latin American countries, it has no significant impact on CO2 emissions in MENA countries. These results highlight the importance of investigating this issue separately across regions, as it is evident that the policy implications may greatly differ.

Keywords: Financial inclusion; CO2 emissions; Panel data analysis; Latin America; MENA

JEL Classification: O16; O57; C33; Q56