CO2 Emission and Financial Development Nexus in Nigeria: Fresh Insights from Asymmetry Cointegration

Abstract

In recent times, studies on the nexus between carbon emissions and financial development have become plentiful. Very few of them consider the nonlinearity or asymmetry of the relationship between financial development indices and CO2 emissions. The objective of this study is to explore asymmetric cointegration within the framework of the non-linear autoregressive distributed lag model on the emissions-financial development nexus using Nigeria's data from 1981 to 2020. Our findings revealed the existence of an asymmetric long-run relationship between CO2 emissions and financial development measured by credit to the private sector, financial deepening, and market capitalization. Positive shocks to Credit to private sectors have a negative and significant impact on the emission at 1% level, while negative shock is not statistically significant in explaining emission in Nigeria. Positive shocks of market capitalization insignificantly reduce emissions and vice versa. Moreover, asymmetric shocks of financial deepening have negative and significant effects on emissions in Nigeria. The study therefore recommends that domestic credits to the private sector should be geared towards enhancing renewable energy, as more investments are required especially in solar and wind energy. In addition, environmental laws be strengthened and pollution taxes be introduced to mitigate the increasing level of CO2 released through the consumption spree for energy-demanding and CO2-emitting goods aided by the increasing level of Nigeria's financial development.