Is growth of the financial sector relevant for mitigating CO₂ emissions in Bangladesh? The moderation role of the financial sector within the EKC model

Environmental degradation has become a serious concern of the government of Bangladesh especially due to the limited scope of the nation in transforming its energy systems in an environmentally sustainable manner. Against this backdrop, this study investigates the impacts of financial sector growth, energy consumption, and economic growth on carbon dioxide emissions in Bangladesh over the period from 1980 to 2019. Besides, the possible moderation impacts of financial sector growth are also explored. Accordingly, the analysis is categorized into two segments in which the former does not consider the moderation effect, while the latter takes the moderation effects into account. Overall, the findings show that the environmental Kuznets curve hypothesis holds for Bangladesh. Besides, the growth of the financial sector is witnessed to improve ecological excellence by reducing carbon dioxide emissions in the country. In contrast, higher consumption of energy is seen to stimulate higher emissions of carbon dioxide in the long run. However, when the moderation effects are considered, the environmental Kuznets curve hypothesis no longer holds valid. This indicates that the development of the financial sector alongside directly reducing the emissions also influences the validity of the environmental Kuznets curve hypothesis in Bangladesh. Hence, in light of these findings, this study recommends the Bangladesh government to strategize its financial development policies by taking the environmental objectives into cognizance. Moreover, to tackle the rise in energy use-related emissions, the government should also use the financial sector to catalyze investments in green projects while inhibiting unclean investments in the country.