Energy Consumption, Financial Development and Environmental Degradation: An Empirical Evidence from SAARC Countries

Abstract

This study examines the correlation between environmental degradation, financial development, and energy consumption in the South Asian Association for Regional Cooperation (SAARC) region. Data covering the period of 1980 to 2022 have been utilized. For empirical estimation, the study applies the Hausman test and the Fixed Effect Model (FEM). The country-specific effects of energy consumption (EC) and financial development (FD) on total greenhouse gases (TGHG) have been checked. The dependent variable is environmental deterioration. TGHGs are used to illustrate ecological degradation. Foreign Direct Investment (FDI) and economic growth have been control variables. FEM results show that EC, Gross Domestic Product (GDP), and FDI all have a significant effect on environmental deterioration. In contrast, the link between FD and TGHG emissions is inverse, implying that FD reduces ecological damage. However, the Environmental Kuznets Curve (EKC) idea has been confirmed since, as GDP grows, pollution begins to drop in an inverted "U-shape." The Pollution Haven Hypothesis (PHH) has also been verified in certain SAARC countries. The findings have significance for governments in encouraging industries to participate in renewable energy projects and for financial institutions in determining how much to subsidize loans for such investment projects to reduce TGHG emissions, resulting in a slightly cleaner environment.