Greening financial development for decarbonization : the mediating role of solar, wind, and hydropower in selected developing OIC countries

Abstract

The escalating greenhouse gas emissions and heavy reliance on fossil fuels in developing OIC countries have intensified climate vulnerability and hindered the sustainable energy transition. Decarbonization entails a systemic shift from fossil fuel dependence to low-carbon energy systems, with reductions in per capita CO2 emissions serving as its key measurable outcome. Existing literature largely treats renewable energy as an aggregate variable and overlooks the distinct mediating roles of specific sources, particularly in resource-constrained developing economies. This thesis examines the direct effect of financial development on per capita CO2 emissions and its indirect effects through the mediating roles of solar, wind, and hydropower in 14 selected developing OIC countries, Algeria, Azerbaijan, Bangladesh, Egypt, Indonesia, Iran, Jordan, Kazakhstan, Lebanon, Mauritania, Morocco, Pakistan, Tunisia, and Türkiye, over the period 2010–2023. Using the IMF Financial Development Index and disaggregated renewable energy data from the World Bank and Our World in Data, the study applies Pesaran’s cross-sectional dependence test, CIPS unit root tests, Westerlund cointegration analysis, and the Pooled Mean Group-Autoregressive Distributed Lag (PMG-ARDL) estimator. The results show that financial development has a statistically significant negative long-run effect on per capita CO2 emissions. However, the mediating effects of renewable sources are heterogeneous: solar energy exhibits a positive but insignificant association with emissions, while wind and hydropower show significant positive coefficients in the current transitional context, attributable to intermittency challenges, fossil fuel backup reliance, and lifecycle emissions. Financial development significantly promotes solar energy deployment in both the short and long run, but its impact on wind and hydropower remains limited. This study concludes that financial development can serve as a powerful instrument for decarbonization in developing OIC countries when effectively channeled toward renewable integration. The findings highlight the need for targeted green finance policies, grid modernization, energy storage solutions, and technology-specific incentives to strengthen mediation channels. By integrating the sustainable energy transition framework with disaggregated mediation analysis, the thesis provides nuanced policy insights for accelerating low-carbon development in fossil-fuel-dependent economies.