Analyzing CO2 Emissions Effect of Financial Development while Accounting for Common Factors in the GCC. Is the Effect Asymmetric?

Abstract

Ignoring common factors can lead to erroneous findings and misleading policy recommendations, according to panel time-series literature. The same consequences occur if the nature of a factor’s effects is incorrectly considered. We investigated CO2 emission effects of financial development (FD) alongside income and international trade in Gulf Cooperation Council (GCC) countries. The Asymmetric Pooled Mean Group augmented with common unobserved factors - a cutting-edge method allowing to discover not only the features of the pooled panel but also the characteristics of each country - was applied to data for 1992–2021. There is no such application for GCC countries, and only one internationally to our knowledge. We show that accounting for factors common to GCC countries is important, as ignoring them makes the CO2 emissions effects of FD flawed. The effects are asymmetric: upturn of FD leads to lower emissions than its downturn. Another key finding is that CO2 emissions in GCC countries may converge to an identical relationship. In designing CO2 emissions mitigation policies, the following points should be considered: directing financial resources toward eco-friendly technologies, energy transitions, and sectors; accounting for global and regional common factors; close cooperation across the region countries due to common factors and convergence.