Financial development,income inequality and carbon emissions in Sub-Saharan African countries: A panel data analysis

Abstract

This paper examines the dynamic relationship between financial development, income inequality and CO2 emissions in a step-wise fashion, using data from 39 sub-Saharan African (SSA) countries during the period 2004-2014. The study uses three income inequality indicators: the Gini coefficient, the Atkinson index and the Palma ratio, to examine these linkages. The study employs the generalised method of moments (GMM) as the estimation technique. The empirical findings show that financial development unconditionally reduces CO2 emissions (metric tons per capita) in SSA countries. The findings also show that there are threshold levels of income inequality that should not be exceeded in order for the negative impact of financial development on CO2 emissions to be sustained. Specifically, the study finds that the negative impact of financial development on CO2 emissions is likely to change to positive if the following inequality levels are exceeded: 0.591, 0.663 and 5.454 respectively for the Gini coefficient, the Atkinson index and the Palma ratio. The findings of this study have far-reaching policy implications, not only for SSA countries, but also for developing countries as a whole. Policy implications are discussed.