Work

Financial development shapes the effects of green funding and integrated trade on carbon emissions in developing economies

Year: 2026

Type: article

Abstract: This paper examines the role of integrated trade in the relationship between green funding and carbon emissions across different levels of financial sector development in 132 developing countries, over the 2004–2024 period. Using a dynamic panel dataset and the two-step System Generalized Method of Moments (System GMM), which controls for endogeneity, unobserved heterogeneity, and dynamic persistence, the study found that green finance initially increases carbon emissions in developing countries, but beyond an estimated turning point of approximately US$35.42 million, additional green finance is associated with reductions in carbon emissions. It is observed that countries with well-developed financial systems have a relatively lower turning point than those with less developed financial systems. The study shows that integrated trade reduces carbon emissions in countries with strong financial sectors, while increasing them in those with weak financial sectors. We find that the effect of green funding on integrated trade is negative and significant, but the impact is more profound with intra-trade relative to inter-trade. The study provides evidence to support that green funding further reduces carbon emissions at higher levels of integrated trade, particularly in a well-developed financial market relative to those in a less developed financial market. A clear policy implication from these findings is that governments should not treat green funding as automatically emission-reducing, but rather as a turning point-dependent tool that only delivers environmental benefits when it reaches sufficient scale and is supported by strong financial and trade institutions.

Source: Discover Sustainability

DOI: 10.1007/s43621-026-04276-5

Author: Daniel Ofori-Sasu

Institution: University of Ghana

Language: English

Topic: Energy, Environment, Economic Growth

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Climate action, Partnerships for the goals, Responsible consumption and production

Open Access status: gold

Estimated APC paid: $1,390