Explaining and modeling the mediating role of energy consumption between financial development and carbon emissions

The effect of financial development on carbon emissions (CO2) has been examined mostly without taking into account the mediating function of energy consumption and how to integrate this effect into a national energy modeling system. This study will address three topics against this background. The first is whether empirical research should study and prioritize the direct or indirect impacts of financial development on CO2 through the mediation of energy consumption. The second is which empirical models should be utilized to assess these impacts. Third is how to include these impacts into a national energy modeling system at the level of policy formulation. The article utilizes the U.S. National Energy Modeling System for 1990M1 - 2021M2 using the bootstrap manifest structural equation modeling technique. The article has three findings. First, empirical study should concentrate more on the indirect rather than direct effects of financial development on CO2. Second, both types of impacts should be incorporated into a national energy modeling system via the distinct (indirect) effects of the components of aggregate financial development, namely financial market development (FMD) and financial institutional development (FID). Third, these effects should be investigated by at least six empirical models that estimate the FMD's and FID's effects on CO2 (i) via the single mediation of sectoral (nonrenewable and renewable) energy consumption, (ii) via the serial mediation of sectoral energy consumption and economic growth, (iii) via the serial mediation of aggregate energy consumption and growth, and (iv) via the serial mediation of energy consumption in one single sector and output in this sector.

Automated summary

This study examines the impact of financial development on carbon emissions, highlighting the mediating role of energy consumption and its integration into a national energy modeling system. The findings suggest that empirical research should focus on the indirect effects of financial development on CO2 and should be evaluated using multiple models.