Environmental impact of financial Market's development in Australia

Abstract

Enhancing environmental quality has become one of the most commonly discussed topics in the modern world, particularly in response to the challenges posed by the increasing threats to climate change. The financial system is acknowledged as a crucial factor in achieving environmental quality by facilitating the flow of financial resources. This study aims to examine the impact of a unique aspect of the financial system—financial market development—on environmental quality in Australia. What sets this study apart from existing works is its comprehensive approach, capturing broader measures of financial market development, including financial market depth, access, efficiency, and stability. By employing the Autoregressive Distributive Lag (ARDL) model over the period from 1983 to 2021, our research demonstrates a positive impact of market-based financial development on Australia's environmental quality by reducing greenhouse gas emissions in the long run. Specifically, an opposing impact of financial market development on environmental quality is evident in the short run. Our findings highlight that financial market development degrades environmental quality in the short run by contributing to increased greenhouse gas emissions, which further emphasizes the importance of integrating both the positive and negative effects of financial market development in policymaking, particularly in the context of achieving Australia's environmental targets.