Finance and the environment: The eco‐impact of market‐ and institution‐driven development in Africa using land‐use‐adjusted metrics across sources of greenhouse gases

Abstract

AbstractAfrica must ensure that its development trajectories are sustainable. In pursuit of viable policy pathways, this study examines the eco‐impact of the energy mix (Te) and financial development (FD) in selected African countries. The Te path is defined using the emission‐intensity paradigm, where positive trends indicate a strong dependence on fossil fuels, while negative trends suggest a shift toward greener energy sources. The FD impact is disaggregated to recognize the separate effects of market‐based (FM) and institution‐based (FI) development. This study utilized land‐use metrics across major greenhouse gas (GHG) sources, drawing data from a panel of 33 countries spanning from 1982 to 2021. It employs a novel instrumental‐variables approach for fitting panel‐data models, addressing cross‐sectional dependence issues and incorporating heterogeneous slope coefficients using the mean‐group estimator. Empirical findings reveal that positive trends in Te have a significant and positive impact on total GHG emissions (GHGe), whereas FM has a negative and significant effect on GHGe, suggesting its active role in mitigating climate impacts. The disaggregation of GHGe highlights the distinct impacts on CO2 (CO2e), nitrous oxide (N2Oe) and methane (CH4e) emissions. Economic affluence positively impacts CH4e, while positive trends in Te primarily increase CO2e. FI significantly reduces N2Oe, while FM notably decreases CO2e. Furthermore, FI has a significant negative impact on the emission intensity of Te, indicating its role in promoting green energy transition. These findings underscore the necessity for nuanced policy interventions that integrate FD with environmental objectives, promote green energy transition and address land‐use challenges.