How Financial Development Affects Carbon Dioxide Emissions In Indonesia? A Cointegration And Causality Analysis
Keywords:
Financial development, Carbon dioxide emissions, Climate change, VECMAbstract
Reducing carbon dioxide emissions is key to mitigating the adverse effects of global climate change. The expansion of the financial industry has become a vital aspect of economic growth, yet it may induce carbon dioxide emissions. This study investigates the relationship and causality between financial development and carbon dioxide emissions in Indonesia. The analysis uses data from 1971 to 2018 for per capita carbon dioxide emissions and credit provided by the financial sector as the main variables, while uses GDP, energy consumption, export value, and population density as the control variables. The Johansen cointegration test and VECM Granger causality are used to analyze the relationship and causality between main variables. The result indicates that financial development has a positive short-run and long-run relationship with carbon dioxide emissions, with bidirectional causation in the long run. It suggests that the government's program to develop the financial sector may harm Indonesia's carbon dioxide emissions. Therefore, the government should consider the environmental implications of financial development and introduce policies that incentivize financial actors to promote green finance and low-carbon technologies and support green initiatives.
Downloads
References
Al-Mulali, U., & Binti Che Sab, C. N. (2012). The impact of energy consumption and CO2 emission on the economic growth and financial development in the Sub Saharan African countries. Energy, 39(1), 180–186. https://doi.org/10.1016/j.energy.2012.01.032
Belloumi, M. (2009). Energy consumption and GDP in Tunisia: Cointegration and causality analysis. Energy Policy, 37, 2745–2753. https://doi.org/10.1016/j.enpol.2009.03.027
Brooks, C. (2008). RATS Handbook to Accompany Introductory Econometrics for Finance. Cambridge University Press.
CDIAC. (2019). Global, Regional, and National Fossil-Fuel CO2 Emissions. Carbon Dioxide Information Analysis Center at Appalachian State University. https://energy.appstate.edu/research/work-areas/cdiac-appstate
Christopoulos, D. K., & Tsionas, E. G. (2004). Financial development and economic growth: Evidence from panel unit root and cointegration tests. Journal of Development Economics, 73, 55–74. https://doi.org/10.1016/j.jdeveco.2003.03.002
Enders, W. (2016). Applied Econometric Time Series (4 ed.). Wiley.
Fitriyah, N. (2019). Financial development and environmental degradation in Indonesia: Evidence from auto regressive distributed lag bound testing method. International Journal of Energy Economics and Policy, 9(5), 394–400. https://doi.org/10.32479/ijeep.8286
FitzGerald, V. (2006). Financial Development and Economic Growth: A Critical View (hal. 1–33). Background Paper for World Economic and Social Survey 2006.
Global Carbon Atlas. (2018). Territorial (MtCO₂). Global Carbon Project. http://www.globalcarbonatlas.org/en/CO2-emissions
Grossman, G. M., & Krueger, A. B. (1995). Economic growth and the environment. The Quarterly Journal of Economics, 110(2), 353–377.
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics (5 ed.). McGraw-Hill/Irwin.
Hanley, N., Shogren, J. F., & White, B. (2006). Environmental Economics in Theory and Practice (2 ed.). Oxford University Press.
Harris, R. (1995). Cointegration Analysis in Econometric Modelling. Prentice Hall.
Imamoglu, H. (2019). The role of financial sector in energy demand and climate changes: Evidence from the developed and developing countries. Environmental Science and Pollution Research, 26(22), 22794–22811. https://doi.org/10.1007/s11356-019-05499-y
Intergovernmental Panel on Climate Change. (2001). Climate Change 2001: The Scientific Basis (J. T. Houghton, Y. Ding, D. J. Griggs, M. Noguer, P. J. van der Linden, X. Dai, K. Maskell, & C. A. Johnson (ed.)). Cambridge University Press.
Intergovernmental Panel on Climate Change. (2018). Global warming of 1.5°C. In V. Masson-Delmotte, P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P. R. Shukla, A. Pirani, M. Moufouma-Okia, C. Péan, R. Pidcock, S. Connors, J. B. R. Matthews, Y. Chen, X. Zhou, M. I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, & T. Waterfield (Ed.), Special Report on Global Warming of 1.5°C. Cambridge University Press.
Jalil, A., & Feridun, M. (2011). The impact of growth, energy and financial development on the environment in China: A cointegration analysis. Energy Economics, 33(2), 284–291. https://doi.org/10.1016/j.eneco.2010.10.003
Kementerian Koperasi & UKM. (2019). Data Perkembangan Usaha Mikro, Kecil, Menengah (UMKM) dan Usaha Besar (UB) Republik Indonesia Tahun 2018-2019. https://www.kemenkopukm.go.id/uploads/laporan/1650868533_SANDINGAN_DATA_UMKM_2018-2019 =.pdf
Khan, M. S., Khan, I., Bhabha, J. I., Qureshi, Q. A., Qureshi, N. A., & Khan, R. (2015). The role of financial institutions and the economic growth: A literature review. European Journal of Business and Management, 7(1), 95–99.
King, R. G., & Levine, R. (1993). Finance, entrepreneurship and growth: Theory and evidence. Journal of Monetary Economics, 32(3), 513–542. https://doi.org/10.1016/0304-3932(93)90028-E
Mishkin, F. S. (2015). Macroeconomics: Policy and practice (2 ed.). Pearson.
Odedokun, M. O. (1996). Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs. Journal of Development Economics, 50, 119–146. https://doi.org/10.1016/0304-3878(96)00006-5
Omri, A., Daly, S., Rault, C., & Chaibi, A. (2015). Financial development, environmental quality, trade and economic growth: What causes what in MENA countries. Energy Economics, 48, 242–252. https://doi.org/10.1016/j.eneco.2015.01.008
Ozturk, I., & Acaravci, A. (2013). The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36, 262–267. https://doi.org/10.1016/j.eneco.2012.08.025
Sadorsky, P. (2010). The impact of financial development on energy consumption in emerging economies. Energy Policy, 38(5), 2528–2535. https://doi.org/10.1016/j.enpol.2009.12.048
Shahbaz, M., Hye, Q. M. A., Tiwari, A. K., & Leitão, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25, 109–121. https://doi.org/10.1016/j.rser.2013.04.009
Solikin, A. (2015). Revealing willingness to pay and willingness to work to avoid deforestation and forest degradation using the contingent valuation method : evidences from Indonesia [Ruhr University Bochum]. https://d-nb.info/109588395X/34
Soytas, U., Sari, R., & Ewing, B. T. (2007). Energy consumption, income, and carbon emissions in the United States. Ecological Economics, 62, 482–489. https://doi.org/10.1016/j.ecolecon.2006.07.009
Stern, D. I. (2004). The rise and fall of the Environmental Kuznets Curve. World Development, 32(8), 1419–1439. https://doi.org/10.1016/j.worlddev.2004.03.004
Stiglitz, J. E. (1998). Knowledge for Development: Economic Science, Economic Policy, and Economic Advice. In Paper prepared for the Annual World Bank Conference on Development Economics, Washington, D.C., April 20–21, 1998.
Suri, V., & Chapman, D. (1998). Economic growth, trade and energy: Implications for the environmental Kuznets curve. Ecological Economics, 25, 195–208. https://doi.org/10.1016/S0921-8009(97)00180-8
Tamazian, A., Chousa, J. P., & Vadlamannati, K. C. (2009). Does higher economic and financial development lead to environmental degradation: Evidence from BRIC countries. Energy Policy, 37(1), 246–253. https://doi.org/10.1016/j.enpol.2008.08.025
Tamazian, A., & Rao, B. B. (2010). Do economic, financial and institutional developments matter for environmental degradation? Evidence from transitional economies. Energy Economics, 32(1), 137–145. https://doi.org/10.1016/j.eneco.2009.04.004
Widarjono, A. (2005). Ekonometrika: Teori dan Aplikasi untuk Ekonomi dan Bisnis. Ekonisia.
Wiesmeth, H. (2022). Environmental economics: Theory and policy (2 ed.). Springer. https://doi.org/10.1017/CBO9780511976650
World Bank. (2014a). CO2 emissions (kt). htps://data.worldbank.org/indicator/EN.ATM.CO2E.KT?end=2014&name_desc=true&start=1960&vi ew=chart
World Bank. (2014b). World Development Indicators: Carbon dioxide by sector. http://wdi.worldbank.org/table/3.10
Yuxiang, K., & Chen, Z. (2011). Financial development and environmental performance: Evidence from China. Environment and Development Economics, 16(1), 93–111. https://doi.org/10.1017/S1355770X10000422
Zhang, Y.-J. (2011). The impact of financial development on carbon emissions: An empirical analysis in China. Energy Policy, 39(4), 2197–2203. https://doi.org/10.1016/j.enpol.2011.02.026
