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Carbon emissions and banking stability: Global evidence

Agbloyor, Elikplimi Kolma and Dwumfour, Richard Adjei and Pan, Lei and Yawson, Alfred (2021): Carbon emissions and banking stability: Global evidence.

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Abstract

This paper examines the impact of per capita CO2 emissions on banking stability. To identify the causal effect of carbon emissions on the stability of banking system, we use plausibly exogenous source of variations in energy use as an instrumental variable (IV) for CO2 emissions. Using data for a panel of 122 countries over the period 2000-2013, our IV regression results indicate that there is an inverted U-shaped relationship between per capita CO2 emissions and banking stability. Our findings reveal that CO2 emissions have a positive effect on banking stability at a low level of emissions and an adverse effect at a higher emissions level. We also find that industrialization as proxied by the ratio of manufacturing value added to GDP can be a potential channel through which per capita CO2 emissions affect banking stability. Our results are robust to alternative specifications and have important implications for policy on banking stability.

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