Financial inclusion and carbon emissions in Sub-Saharan Africa : the moderating role of governance effectiveness

Abstract

This study examines the relationship between financial inclusion and carbon dioxide (CO2) emissions in Sub-Saharan Africa, with governance effectiveness as a moderating variable. Despite rapid financial sector expansion across the region, the environmental consequences of financial deepening remain poorly understood, particularly in the context of weak institutions and fossil-fuel-dependent energy systems. This study employs a balanced panel dataset of 43 Sub-Saharan African countries over the period 2004–2024. A composite Financial Inclusion Index (CFII) was constructed using Principal Component Analysis (PCA) applied to five indicators covering the access and usage dimensions of formal financial services. Metric tons per capita is used to measure the Carbon emission proxy in this study, while governance effective estimates ranging from -2.5 - + 2.5 is adopted as the moderating variable. The econometric models were estimated using Fixed Effects with Driscoll-Kraay standard errors following diagnostic tests confirming heteroskedasticity, serial correlation, and cross-sectional dependence. The results reveal that financial inclusion significantly increases CO2 emissions, confirming that the scale effect dominates under current structural conditions. Governance effectiveness significantly attenuates this positive effect, establishing that stronger institutions redirect financial flows toward environmentally sustainable activities. The EKC hypothesis is confirmed but it indicate that all SSA countries remain on the upward emission segment. Colonial group analysis reveals that the pollution-intensifying effect is largest in former French colonies and smallest in Other colonial groups, reflecting inherited institutional quality gradients. The study concludes that financial inclusion must be pursued alongside governance reforms, green finance integration, and clean energy transition to achieve sustainable development outcomes in Sub-Saharan Africa.