Can financial innovation and environmental policy curb transport-based CO2 emissions? An advanced panel analysis

The escalating levels of CO2 emissions from the transportation sector have been observed to exert deleterious effects on human well-being and environmental sustainability. To mitigate these emissions, it is imperative to consider the potential contributions of environmental policies and financial innovation. Thus, this study examines the effects of financial innovation and environmental policy (environmental tax-environmental technology) on transport-related CO2 emission (TCO2E) for BICS (i.e., Brazil, India, China and South Africa), which are characterized by substantial industrialization, rising TCO2E and growing environmental concerns. The analysis is complemented by including control variables, notably economic growth and the transition to cleaner energy, to offer a nuanced and holistic perspective on the dynamics governing this critical subject matter. The research adopts a novel econometric approach cross-sectionally augmented auto-regressive distributed lags for benchmark estimation and fully modified ordinary least squares-dynamic ordinary least squares for robustness analysis from 2000/Q1-2018/Q4. The findings revealed that financial innovation and economic growth bolster TCO2E and decrease environmental quality in the region. In contrast, environmental tax, environmental innovation and energy transition decrease TCO2E. Based on findings, policy suggestions relating to implementing a carbon tax, promoting green financial innovation and others are discussed to decrease TCO2E.