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Is financial development good for carbon mitigation in India? A regime shift-based cointegration analysis

ABSTRACT The present study investigates the long-run impact of financial development, energy consumption and economic growth on greenhouse gas emissions for India, in the presence of endogenous structural breaks, over the period 1971–2013. The autoregressive distributed lag bounds testing procedure (ARDL) and Hatemi-J threshold cointegration technique were used to test the variables for cointegration. ARDL bounds test did not confirm any cointegrating relationship between the variables. The threshold cointegration test establishes the presence of long-run impact of financial development, energy use and economic growth on greenhouse gas emissions in India. The results reveal that the long-run relationship between the variables has witnessed two regime shifts, in 1978 and 2002. The empirical evidence shows that financial sector development and energy consumption in India degrade the environment. Unlike previous studies, this paper finds no statistical evidence of a long-run relationship between economic growth and environmental deterioration. The study also challenges the existence of an environmental Kuznets curve in India.