Can digital financial inclusion facilitate renewable energy consumption? Evidence from nonlinear analysis

Abstract

The Paris climate agreement aims to achieve carbon neutrality by reducing carbon emissions all over the world. This can be accomplished by encouraging all stakeholders to switch to more carbon-free production methods, such as renewables, which cannot be achieved without high-level subsidies and financial aid. Therefore, the financial sector is inextricably linked to the renewable energy transition. The entire world is watching India, the world's second-largest importer of fossil fuels and the world's fourth-largest emitter of greenhouse gases. In this context, this work employs a financial development index in three dimensions: the overall financial development, the market-based financial development, and the bank-based financial development. We used the asymmetric nonlinear autoregressive distributed lags econometric model on data from 1980Q1 to 2020Q4 to investigate the effect of financial development on renewable energy consumption (REC) in India. As control variables, the model included real gross domestic product (GDP), trade openness, and oil prices. The empirical evidence shows that negative changes in overall and market-based financial developments (shocks) have a significant impact on REC. Changes in the development of bank-based finance have no immediate impact on REC. In the instantaneous and one-lagged periods, the later effect is both positive and negative. The asymmetric long-run effect of negative and positive changes (shocks) in all three dimensions of financial development has a significant impact on REC. As control variables, the model included real GDP, trade openness, and oil prices. Our empirical findings have significant policy implications.