The impact of economic and financial development on carbon emissions : evidence from Sub-Saharan Africa

Abstract

In the literature, some studies argue that affluence and the financial sector encourages low-carbon investments which result in lower emissions while others find that they enhance emissions. Contemporary studies barely consider agriculture, employment generation and the degree of financial development as determinants of emissions. In view of these, the thesis investigates the impact of economic and financial development on CO2 emissions in sub-Saharan Africa (SSA). Applying the EKC and STIRPAT framework, the study modelled three functional forms which were estimated using an unbalanced panel data of 45 SSA countries by employing static and dynamic analytical methods. The models were re-estimated for 24 low (LIC), 13 lower-middle (LMIC), six upper-middle (UMIC) and two high-income countries (HIC). The study found evidence that empirical results differ in terms of the (sub-) sample of countries, estimation methods and functional forms. In detail, the study found different CO2 emissions-economic development relationships for the income groups. However, there is evidence of a linkage between later developments of the economies with lower emissions in LIC and UMIC while this linkage does not exist in LMIC and HIC. The study also found that financial development lowers CO2 in UMIC while it enhances emissions in LIC, LMIC and HIC. Despite this, there is evidence of a linkage between later developments of financial sectors with higher emissions in LIC and HIC and a linkage between later developments of financial sectors with lower CO2 in UMIC in SSA meanwhile no linkage was found for LMIC. The study concludes that not all economic development increases the level of CO2 emissions and not all financial development limits CO2 emissions in SSA during the study period. Generally, the main contributory variables to CO2 emissions are income, trade openness, energy consumption, population density and domestic credit to private sector to GDP. The main reducing factors of CO2 emissions are agriculture and official exchange rate. The thesis recommends that SSA needs to be more responsive to a cleaner CO2 environment by moving away from the conduct of unclean development strategy to intensified green investments.