The Impact of Financial Inclusion and Digitalization on CO2 Emissions: A Cross-Country Empirical Analysis

Abstract

This research investigates the influence of financial inclusion and digitalization on carbon dioxide (CO2) emissions by analyzing a sample of 38 countries from 2006 to 2020. For our analysis, we use the SGMM method and fixed-effect panel threshold models. Financial inclusion and digitalization are measured using newly constructed indices derived from principal component analysis. Despite some variations in specific details, the overall trend in the relationship among CO2 emissions, financial inclusion, and digitalization remains consistent across high-income and low- and middle-income countries. Our findings reveal that financial inclusion has a significant and non-linear impact on CO2 emissions. Conversely, digitalization is found to reduce CO2 emissions significantly. Furthermore, the threshold models indicate that the impact of financial inclusion on CO2 emissions varies depending on the levels of financial inclusion and digitalization. The influence of financial inclusion on CO2 emissions is lower at higher levels of financial inclusion and digital technology, and vice versa. Our findings have implications for policymakers who seek to develop economic policies for sustainable development. By adopting policies that promote digital technologies, policymakers can enhance financial inclusion and economic growth and reduce CO2 emissions.