Unraveling the Nexus Between Financial Openness and Environmental Quality: Green Finance as the Catalyst in CEE Countries

Abstract

The use of fossil fuels, which is still seen as the cheapest energy source today, has increased carbon emissions and contributed to the formation of greenhouse gases, and this gas has reached levels that threaten world health. While studies on this problem often question the relationship between production volume, energy use, and carbon emissions, few studies question the effects of the financial assets, which are the providers of investments made for production purposes, on environmental degradation. This study used the fixed effect model and system GMM technique to analyse the moderating effect of green finance in connection to financial openness and environmental quality from 2015 to 2020 in the CEE countries. Findings show, among other things that (1) CO2 in CEE countries is still growing; (2) financial openness is a positive and significant indicator of CO2 emission; and (3) that green finance usage reduces the positive impact of financial openness on CO2 emissions. The study suggests that financial openness, renewable energy (RE) investment, and green technology innovation (GTI) — consistently drive CO2 emissions in CEE countries. The study suggests that policies promoting green finance, particularly RE investment and GTI, can help mitigate environmental degradation and reduce CO2 emissions.