Publication: Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries
Loading...
Published
2024-10-16
ISSN
Date
2024-10-16
Author(s)
Editor(s)
Abstract
Financial deepening contributes to economic development, but its effect on the carbon intensity of production is an open empirical question. If banks finance investments in new, greener technologies, they can contribute to lowering carbon dioxide emissions per unit of output. But if they finance investments in more traditional, carbon-intensive technologies, they can contribute to increasing carbon dioxide emissions per unit of output. This paper studies the impact of financial deepening—an increased provision of bank credit as a share of gross domestic product—on carbon dioxide emissions per dollar of gross domestic product in a global sample of 125 economies from 1990 to 2019. Using a local projections approach, the paper finds that, on average, financial deepening leads to a relative increase in carbon dioxide emissions per dollar of gross domestic product, indicating that financial institutions finance relatively more carbon-intensive investments and consumption. However, a better institutional environment mitigates this adverse effect of financial deepening: conditional local projections reveal that in countries with more environmental regulations, a stronger rule of law, and a financial system that is relatively more market- than bank-based, financial deepening does not lead to higher carbon dioxide emissions per dollar of gross domestic product. Specifically, the results show that countries with an initially lower carbon intensity of production can mitigate the average adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product by improving their general institutional environment proxied by adherence to the rule of law, and, to some extent, by developing their financial markets. By contrast, countries with an initially higher carbon intensity of production are better off focusing on environmental regulations to mitigate the unconditional adverse effect of financial deepening on carbon dioxide emissions per dollar of gross domestic product.
Link to Data Set
Citation
“Fisera, Boris; Melecky, Martin; Singer, Dorothe. 2024. Financial Deepening and Carbon Emissions Intensity: Evidence from a Global Sample of Countries. Policy Research Working Paper; 10948. © World Bank. http://hdl.handle.net/10986/42254 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication The Evolution of Local Participatory Democracy in Nepal(Washington, DC: World Bank, 2025-11-05)Nepal is, according to its constitution, among the world’s most decentralized countries, with a long and complex tradition of local-level public participation. This paper traces the evolution of Nepal’s modern participatory institutions, examining the extent to which they are “induced” by external interventions versus being “organically” rooted in indigenous practices. The paper identifies three broad phases: an initial focus on participation in project implementation; a subsequent phase that expanded citizen engagement; and a third phase of citizen empowerment, culminating in the 2015 federal constitution, which granted unprecedented local autonomy. The analysis yields five key findings. First, over the past 50 years, successive reforms have progressively expanded opportunities for citizens to influence local decision-making. Second, these reforms have integrated traditional participatory mechanisms into formal institutions of local government. Third, although central-level initiatives exist, most participatory platforms continue to operate at the local level. Fourth, the federal constitution has created a new landscape of local democracy, embedding autonomy and accountability. Fifth, although they are still valued in many ethnic and territorial communities, traditional participatory practices are gradually disappearing. The paper concludes by offering policy recommendations to help donor agencies and governments strengthen Nepal’s democratic trajectory. It argues that effective interventions should build on Nepal’s deep participatory traditions while recognizing the constitutional reality of far-reaching local autonomy.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication Closing the Gender Gap in Entrepreneurship: Overcoming Challenges in Law and Practice for Female Entrepreneurs(Washington, DC: World Bank, 2026-01-07)Despite significant strides toward gender equality, women around the world continue to encounter systemic obstacles that hinder their entrepreneurial success. This paper systematically reviews the literature on the barriers female entrepreneurs face and the solutions proposed to overcome these challenges. It discusses institutional factors, financial factors, human capital factors, and social and cultural factors. The literature overview is complemented by a series of stylized facts that illustrate how overcoming some of these existing barriers is correlated with improved women’s entrepreneurship and female labor force participation, drawing on the World Bank’s Women, Business and the Law database as well as the World Bank’s Enterprise Surveys. The findings underscore the need for creating an enabling environment where women can thrive as entrepreneurs.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Financial Inclusion and Legal Discrimination Against Women : Evidence from Developing Countries(World Bank, Washington, DC, 2013-04)This paper documents and analyzes gender differences in the use of financial services using individual-level data from 98 developing countries. The data, drawn from the Global Financial Inclusion (Global Findex) database, highlight the existence of significant gender gaps in ownership of accounts and usage of savings and credit products. Even after controlling for a host of individual characteristics including income, education, employment status, rural residency and age, gender remains significantly related to usage of financial services. This study also finds that legal discrimination against women and gender norms may explain some of the cross-country variation in access to finance for women. The analysis finds that in countries where women face legal restrictions in their ability to work, head a household, choose where to live, and receive inheritance, women are less likely to own an account, relative to men, as well as to save and borrow. The results also confirm that manifestations of gender norms, such as the level of violence against women and the incidence of early marriage for women, contribute to explaining the variation in the use of financial services between men and women, after controlling for other individual and country characteristics.Publication Energy Intensive Infrastructure Investments with Retrofits in Continuous Time : Effects of Uncertainty on Energy Use and Carbon Emissions(World Bank, Washington, DC, 2013-04)Energy-intensive infrastructure may tie up fossil energy use and carbon emissions for a long time after investments, making the structure of such investments crucial for society. Much or most of the resulting carbon emissions can often be eliminated later, through a costly retrofit. This paper studies the simultaneous decision to invest in such infrastructure, and retrofit it later, in a model where future climate damages are uncertain and follow a geometric Brownian motion process with positive drift. It shows that greater uncertainty about climate cost (for given unconditional expected costs) then delays the retrofit decision by increasing the option value of waiting to invest. Higher energy intensity is also chosen for the initial infrastructure when uncertainty is greater. These decisions are efficient given that energy and carbon prices facing the decision maker are (globally) correct, but inefficient when they are lower, which is more typical. Greater uncertainty about future climate costs will then further increase lifetime carbon emissions from the infrastructure, related both to initial investments, and to too infrequent retrofits when this emissions level is already too high. An initially excessive climate gas emissions level is then likely to be worsened when volatility increases.Publication How to Keep Momentum Up in Carbon Markets?(World Bank, Washington, DC, 2011-10-31)This note examines how to maximize the benefits from the use of market instruments in support of developing countries' low-emission development priorities. First, it briefly surveys the current state and trends of the carbon market, highlighting the main achievements of carbon finance over its decade-long history. Second, it reviews updated scenarios of the scale of future carbon markets and associated financial flows, in light of developments in climate negotiations and domestic markets. Finally, it identifies the necessary steps to scale up carbon market flows in future, on both the demand and supply sides, including the reform of existing mechanisms, and innovation to broaden the scope, scale and reach of carbon markets. The most important determinant of carbon offset market flows to developing countries is clearly the level of international mitigation targets: the more ambitious the targets the greater the scope for such flows. Developed countries can also encourage flows by increasing supplementary limits, which are the proportion of mitigation targets that can be met by purchases from developing countries. Finally, there remains a considerable need for innovation, awareness-raising and capacity building in public and private institutions in developing countries, to increase their participation in the carbon market and build and enabling environment for low-emission development.Publication The Nexus of Financial Inclusion and Financial Stability(World Bank, Washington, DC, 2016-06)Policy makers and regulators have devoted much effort to reforms aimed at improving financial stability in response to lessons from the 2007-09 crisis. At the same time, much effort has also been directed to promoting greater financial inclusion as an enabler of equal opportunity. To some extent, these endeavors have been exerted in silos, neglecting the possibility that financial inclusion and financial stability could be significantly intertwined, positively or negatively. If there are synergies or trade-offs between inclusion and stability, policy decisions must be informed, and the policy setting, design, and implementation adjusted accordingly. This paper (i) discusses the relationship between financial inclusion and stability, (ii) illustrates empirically interactions between the two financial sector outcomes, and (iii) outlines policy challenges stemming from these interactions.Publication Making Cross-Border Banking Work for Africa(Eschborn, Germany: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, 2014)Cross-border banking has been a critical part of Africa's financial history since colonial times. While the period after independence saw a wave of nationalization across the continent, with many of the colonial banks exiting, this trend was reversed in the 1980s with the arrival of financial liberalization. Failing state-owned and private banks were sold mostly to global investors or multinational banks. Increasing international and regional economic integration, including of financial services, and deregulation further increased the number of foreign banks and by the mid-2000s many African banking systems were yet again dominated by foreign banks. This introductory chapter documents trends in cross-border banking in Africa and the increasing shift in the composition of foreign banks in Africa. The next section provides a short overview of financial systems in Africa to set the stage. Section two characterizes the population of cross-border banks operating in Africa today, their expansion across the continent, and their importance in the host countries. Section three explores the reasons for the expansion of cross-border banking on the continent. Section four assesses the different business models banks use to expand across the continent as well as the characteristics of their group structures. Section five concludes.
Users also downloaded
Showing related downloaded files
Publication Statistical Performance Indicators and Index(World Bank, Washington, DC, 2021-03)The World Bank’s Statistical Capacity Index has been widely employed to measure country statistical capacity since its inception two decades ago. This paper builds on the existing advantages of the Statistical Capacity Index, conceptually and empirically, to offer new statistical performance indicators and the Statistical Performance Index, which can better measure a country’s statistical performance. The new index has clearer conceptual motivations, employs a stronger mathematical foundation, and significantly expands the number of indicators and countries covered. The paper further provides empirical evidence that illustrates the strong correlation of the new index with other commonly used development indicators of human capital, governance, poverty, and inequality. The framework can accommodate future directions to improve the index as the global data landscape evolvesPublication Governance in Sub-Saharan Africa in the 21st Century(Washington, DC: World Bank, 2024-03-04)What can be learned from the governance trajectory of African countries since the beginning of the 21st century What is the quality of governance on the African continent and how does it shape development The first decade of the millennium saw promising growth and poverty reduction in much of the continent. Yet, Sub-Saharan Africa has also been the stage of a stream of governance reform failures and policy reversals, and many countries continue to suffer from the consequences of poor governance. This paper explores the dynamics of governance reform on the continent over the past two decades and points to four key trends. First, effective state institutions, capable of maintaining peace, fostering growth, and delivering services, have developed unevenly. Second, progress has been made on enhancing the inclusiveness and accountability of institutions, but it remains constrained by the weakness of checks and balances and the persistence of patterns of centralized and exclusive power arrangements. Third, civic capacity has risen considerably, but the inability of institutions to respond to social expectations and political mobilization threatens to turn liberal civic engagement into distrust, populism, and radicalization. Fourth, the combination of these three trends contributes to the rise of political instability, which constitutes a major threat for the continent.Publication Evolution of the World Bank’s Thinking on Governance(World Bank, Washington, DC, 2016-01)The preparation work for the 2017 World Development Report on Governance and the Law in 2016 will coincide with the 25th anniversary of the World Bank’s decision to broaden its ongoing work on public sector management to embrace key issues of governance in the Bank’s borrowing countries. This paper provides a broad overview of the major Bank reports on governance that went through a review process at a sufficiently high level in the institution that they can reasonably be described as reflecting the Bank’s considered views at the time on the subject. The objective is to review the evolution of the Bank’s thinking on governance and assess the relevance and effectiveness of the work and its implications for the forthcoming World Development Report. Section two of this paper begins with a brief account of how the Bank came to focus on issues of governance, reviewing the major upheaval of governance in many of the Bank’s borrowing countries in the 1980s, the legal constraints the Articles of Agreement impose on the Bank’s work on governance, and a brief overview of the Bank’s initial policy statement on governance issued to the Bank’s Board in June 1991. Section three reviews major Bank work on governance as reflected in successive World Development Reports and examines the Bank’s analysis of the issue of corruption, reviewing how the Bank’s thinking on this symptom of poor governance has evolved. Section four steps back to assess what the Bank got right and some of the issues it missed or failed to address adequately. Section five draws attention to the dramatic changes experienced by the developing world in these past 25 years, and points to the need to better understand the implications of these changes for the governance context facing developing countries.Publication Data Transparency and Growth in Developing Economies during and after the Global Financial Crisis(World Bank, Washington, DC, 2020-12)The study explores the effects of data transparency on economic growth for developing economies over a unique time period—at the onset of the 2007–2009 global financial crisis and thereafter. Data transparency is defined as the timely production of credible statistics as measured by the Statistical Capacity Indicator. The paper finds that data transparency has a positive effect on real gross domestic product per capita during a period of considerable uncertainty. The estimates indicate an elasticity of the magnitude of 0.03 percent per year, which is much larger than the elasticity of trade openness and schooling in the estimation sample. The empirics employ a variety of econometric estimators, including dynamic panel and cross-sectional instrumental variables estimators, with the latter approach yielding a higher estimated elasticity. The findings are robust to the inclusion of several factors in addition to political institutions and exogenous commodity-price and external debt-financing shocks.Publication Economic Governance Improvements and Sovereign Financing Costs in Developing Countries(World Bank, Washington, DC, 2021-05)Low- and middle-income country governments are increasingly tapping the global debt capital markets. This is increasing the amount of finance available for development, but at a considerably higher cost than traditional external borrowing on concessional terms. Using a novel methodology based on estimating sovereign credit ratings using the Moody’s scorecard, and examining the associations between these ratings and the World Bank’s Country Policy and Institutional Assessment scores, this paper examines how making improvements in the quality of economic policies and institutions can help lower governments’ financing costs. This method aims to overcome the small-sample problem due to the number of rated developing country sovereigns still being relatively limited (although growing). Better economic governance Country Policy and Institutional Assessment scores are associated with better estimated ratings and materially lower financing costs; on average, improvements that are sufficient to increase the Country Policy and Institutional Assessment economic governance indicator score by one point are associated with interest costs that are lower by about 40 basis points, even setting aside the direct impact on ratings of better governance indicators. There are many reasons why improving governance is a good thing. Among them is the potential payoff to the public purse — savings of $40 million or more on a standard $1 billion, 10-year bond.