Working Paper: CEPR ID: DP14012
Authors: Ralph de Haas; Alexander Popov
Abstract: We study how countries’ financial structure affects their transition to low-carbon growth. Using global industry-level data, we document that carbon-intensive industries reduce emissions faster in economies with deeper stock markets. The main channel underpinning this stylised fact is that stock markets facilitate green innovation in carbon-intensive sectors, resulting in lower carbon emissions per unit of output. More tentative evidence indicates that stock markets also help to reallocate investment towardsmore energy-efficient sectors. Cross-border spill-overs are limited: less than five percent of these industry-level reductions in domestic emissions are offset by carbon embedded in imports. A firm-level analysis of an exogenous shock to the cost of equityin Belgium confirms our findings.
Keywords: financial development; financial structure; carbon emissions; innovation
JEL Codes: G10; O4; Q5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock market depth (G10) | emissions reductions (Q52) |
| stock market depth (G10) | green innovation (Q55) |
| green innovation (Q55) | emissions reductions (Q52) |
| financial policy shocks (E62) | equity ratios (G32) |
| equity ratios (G32) | carbon intensity of production (L94) |
| stock market depth (G10) | investment towards energy-efficient sectors (Q48) |
| domestic emissions reductions (Q58) | carbon leakage (Q54) |