Impact of financial development and renewable energy consumption on environmental sustainability: a spatial analysis in CEMAC countries

Abstract

This research aims to examine the impact of financial development and renewable energy consumption on CO₂ emissions in CEMAC for the period 1990–2018. The study employs spatial analysis approach. As previous investigations have overlooked the effects of the spatial interactions in demonstrating environmental sustainability across nations, this paper gives the first comprehensive spatial analysis of CO₂ emissions among countries. To eliminate possible bias and inefficiency in estimated coefficients, the spatial autoregressive model is used to account for both geographical dependency and individual heterogeneity. The results revealed that under economic distance weights, the values of the spatial lag coefficients of financial development (FD), foreign direct investment (FDI), gross domestic product (GDP), and renewable energy consumption depict negative and statistical significance effects regarding spatial fixed effects in the SDM model, while trade openness (TO) shows a negative and insignificant impact. Other decomposition effects results show that FD had both direct and indirect significantly negative effects on environmental sustainability in CEMAC. This indicates that FD has a significant negative effect on CO₂ emissions in both the local country and its adjoining countries. On average, a unit change in FD in each country and its neighboring countries would reduce dioxide carbon by 0.071 and 0.066, respectively, and that of the whole region would be 0.137 units, meaning that environmental sustainability will improve. However, GDP recorded significantly positive direct and indirect effects on environmental sustainability. The direct and indirect effects of FDI on CO2 in both the local and neighboring countries were negative but statistically insignificant. On the other hand, the direct and indirect effects of TO on environmental sustainability were positive and statistically significant. Along with significant and statistical effects of financial development, GDP, FDI, renewable energy consumption, and TO, the findings reveal the presence of a positive spatial dependency of CO₂ emissions in CEMAC. This implies that policymakers in CEMAC countries lean to rely on their environmental sustainability decisions to assign financial and investments to that of neighboring nations. Furthermore, the findings indicate that adjacent countries’ FD and REC have a considerable impact on a country’s CO₂ emissions. Our findings offer significant political implications, implying that financial development and renewable energy consumption should be strengthened to meet environmental sustainability goals.