Effect of Islamic financial development on carbon emissions: A spatial econometric analysis

In this research, data from 36 countries from 2013 to 2018 were used to examine the factors influencing CO₂ emissions in Islamic countries, focusing on the impact of Islamic financial growth. The spatial econometric technique estimation findings indicate that there is no geographical association between CO₂ emissions in the analyzed countries. The test findings establish the existence of the Kuznets hypothesis for the environment. Additionally, trade openness and increased energy usage have resulted in an increase in CO₂ emissions. The impacts of traditional financial development factors, such as financial market and financial institution variables, were examined in this research. The findings indicate that the two variables have no direct and substantial influence on CO₂ emissions and that their significant effect on CO₂ emissions appears only when their nonlinear and spillover effects on energy consumption and economic growth are included. Additionally, the growth of financial institutions is inversely proportional to the intensity of carbon emissions. The results indicate that while the development of financial markets and institutions results in a significant increase in CO₂ emissions, the negative coefficient of the interaction between financial development and energy consumption indicates that financial development ensures energy efficiency, which reduces the intensity of carbon emissions. The findings indicate that the expansion and depth of Islamic finance, as measured by total assets, asset quality, earnings, and efficiency of Islamic banks, can result in a nonlinear increase in CO₂ emissions with a U-shaped relationship. The study of spillover effects demonstrates that in addition to their direct and positive effects on CO₂ emissions, the increase in Islamic social responsibility and consumer education, and awareness about Islamic banking reduce the enhancing effects of energy consumption on greenhouse gas emissions.