Impact of Banking Development on CO2 Emissions in Iran

Identifying the effect of energy consumption, economic growth and foreign trade on CO2 emissions have been studied at both national and international levels. However, there have been very few researches on the effect of financial and banking development on the CO2 emissions, especially in Iran. So, this study aimed to cover this research gap.
This study was a time-series analyses over the period of 1971-2011. In order to investigate about existence of a long-run co-integration relationship between CO2 emissions and banking development indicators in Iran, long-run coefficients were estimated by Autoregressive Distributed Lag (ARDL) and Dynamic Ordinary Least Squares (DOLS) approaches. Moreover, to carry out the econometric tests Microfit (5.0) and Eviews (9.0) software were used.
Findings showed that the ratio of domestic credit to private sector by banks to GDP (Banking Development Indicator) reduces CO2 emissions in Iran. In addition, results confirm with theories and other empirical studies showed that energy consumption has positive and significant effect on CO2 emissions in long-run.
The government can help to improve environment quality by establishing a strong policy making on credit to firms by banking system. Because in this framework firms to receive credit from banking system are required codified programs to reduce negative outcomes of energy consumption and this lead to a less CO2 emissions in long-run.