Nexus between financial development and CO 2 emissions in Saudi Arabia: analyzing the role of globalization

Abstract

This study examines the contribution of financial development to environmental degradation in Saudi Arabia in the period from 1971 to 2016, controlling the model for globalization and electricity consumption. The autoregressive distributive lag (ARDL) and vector error correction methods (VECM) are applied to the long-run and causal relationship, respectively. Empirical results indicate that financial development contributes to CO₂ emissions and degrades environmental quality. The results also show that the role of globalization in environmental degradation is insignificant and that electricity consumption is the main culprit behind the growing CO₂ emissions in Saudi Arabia. In addition, bidirectional causality exists between globalization and CO₂ emissions in the long run, and financial development and CO₂ emissions Granger-cause each other. Insights from the study help policymakers to understand the roles of financial development and globalization in environmental degradation and to comply with global mandate for the reduction of CO₂ emissions.