The Dynamic Nexus Among Energy Diversification and Carbon Emissions in the E7 Economies: Investigating the Moderating Role of Financial Development

This study investigates the role of financial development in moderating the impact of energy diversification on carbon emissions reduction, using a sample of seven major emerging (E7) economies over the period 1995-2018. A panel cointegration test is employed to investigate any long-run equilibrium relationship among variables. The moderating effect is uncovered using a panel autoregressive distributed lag (ARDL) model. The results from the cointegration test reveal the presence of a long-run equilibrium linkage among financial development, energy diversification, and carbon emissions. The panel ARDL model results indicate that the carbon emissions reduction effect of energy diversification is strengthened by an increased level of financial development in the long-run. Notably, a 1% increase in energy diversification accompanied by a 1% increase in financial development favorably moderates the carbon emissions reduction impact by about 2.11%. This finding is novel and contributes to our understanding of how financial development moderates the carbon emissions reduction effect of energy diversification. Based on this finding, appropriate policy recommendations are suggested to achieve energy transition goals in the E7 economies.