Financial policy and socio-economic dimension on co2 emissions : revisiting the G20 countries

Abstract

The issue of climate change, driven by high concentrations of CO2 emissions in the atmosphere, has garnered global attention. Consequently, the Paris Agreement represents a commitment by nations worldwide to address climate change by agreeing to limit the rise in global surface temperature to below 2°C, and ideally below 1.5°C, by 2050. This necessitates a transition to a greener economy, which is hindered by significant funding challenges, particularly for renewable energy financing and the transfer of environmentally friendly technology. Additionally, socio-economic factors must be considered, as population growth and urbanization increase demand in the energy and infrastructure sectors. This study aims to examine the effects of climate-related financial policy through climate-related financial policy index (CRFPI) and socio-economic factors on CO2 emissions in G20 countries from 2000 to 2020. Utilizing a panel regression random effects model, the impact of exogenous variables on CO2 emissions is found to be varied. CRFPI significantly reduces CO2 emissions, as does financial development. The Environmental Kuznets Curve (EKC) hypothesis is validated, showing that in the early stages, GDP positively affects CO2 emissions; however, as GDP growth reaches a turning point, economic growth negatively impacts CO2 emissions in the long term, indicating that G20 countries are predominantly characterized by progressive economic growth. Empirical evidence, particularly regarding socio-economic factors, presents diverse results. Renewable energy consumption leads to the most substantial reduction in CO2 emissions, while the response of CO2 emissions to FDI inflows shows a positive trend, suggesting that investment flows need better alignment with environmental sustainability goals. Finally, trade openness, urbanization, population, and technology patents do not show significant impacts. Despite the dynamic nature of empirical evidence, CRFPI, through various instruments such as green prudential policy, green financial principles, green investment and credit allocation, green bonds, and other disclosure requirements, can serve as alternative financing mechanisms to achieve net-zero emissions targets.