Does financial sector development mitigate power sector-based carbon dioxide emissions to establish environmental sustainability in BRICS?

Abstract

Since the BRICS bloc accounts for around half of global carbon-dioxide (CO2) emissions associated with energy use. Thus, mitigating CO2 emissions is critically important not only to promote environmental sustainability across this bloc, but also for the sake of improving global environmental conditions as a whole. Accordingly, this study evaluates whether financial sector development is likely to enable the BRICS countries to curtail emissions associated with their power sectors, while controlling for their natural resource dependency, renewable energy adoption, institutional quality, and international trade participation levels. Regarding novelty, while past studies mostly assessed how financial development and natural resources independently affect total CO2 emission levels, this study also emphasizes the joint impacts of financial development and natural resources specifically on Power Sector-based Carbon-dioxide Emissions (PSCO2) in the BRICS countries. In addition, although past studies checked how natural resources, as a whole, affect CO2 emissions, this study probes further to estimate whether the natural resource-CO2 emissions nexus exhibits heterogeneity across dependencies on different types of natural resources. Accordingly, based on empirical estimates, it is found that as financial sectors in the BRICS countries develop, their yearly PSCO2 are likely to rise as well. Besides, more reliance on natural resources is also found to exert CO2 emission-boosting impacts in the long-run. However, financial sector development and natural resource dependency are jointly observed to mitigate the yearly CO2 emission figures of the BRICS countries. Thus, these findings endorsed that developing the financial sector by providing green financial services can enhance the productivity of natural resource sectors, which, in turn, might enable the BRICS countries to partially offset the PSCO2-boosting impacts associated with natural resource dependency. Moreover, the findings also affirm that annual PSCO2 can be reduced by undergoing the renewable energy transition. Contrastingly, enhancing quality of institution was found to enhance the emissions levels, while international trade's effect on emissions is not statistically conclusive. Furthermore, when disaggregated natural resource data is considered, the above findings are found to hold most natural resource types considered in this study. In addition, the robustness of the findings across alternative estimation techniques is also confirmed by findings derived from the robustness-checking analysis. Therefore, in the BRICS context, these findings highlight the significance of adopting green financial sector development policies, making natural resource-based sectors more productive and less energy intensive, enhancing renewable energy transition speeds, and developing strict environmental institutions.