Determinants of Environmental Quality in Nigeria: Assessing the Role of Financial Development

Ekundayo Peter Mesagan; Mike I. Nwachukwu

doi:10.33119/ERFIN.2018.3.1.3

Ekundayo Peter Mesagan Department of Economics, University of Lagos, Nigeria
Mike I. Nwachukwu Department of Economics, University of Lagos, Nigeria

DOI: https://doi.org/10.33119/ERFIN.2018.3.1.3

Keywords: Financial Development, Energy, Income, Environment, Nigeria

Abstract

In this study, we analyze the determinants of environmental quality in Nigeria, focusing on the role of financial development. It is a time series analysis covering the period from 1981 to 2016. The study uses the ARDL bounds testing approach to analyze data on urbanization, per capita income, environmental degradation, energy consumption, trade intensity, and capital investment. We generate the environmental degradation index using principal component analysis (PCA). Empirical results suggest that income, financial development, energy consumption, and trade are significant in explaining environmental quality, whereas investment and urbanization are insignificant in the model. Moreover, we find no causality between the capital investment, financial development, and environmental quality, although urbanization and income unidirectionally cause environmental degradation. Also, there exists a bidirectional causality between energy consumption and environmental degradation. Therefore, to ensure efficient credit allocation to low carbon emitting firms, financial sector operators should adequately screen investment proposals before committing funds to them.

References

Abid, M. (2017). Does economic, financial and institutional developments matter for environmental quality? A comparative analysis of EU and MEA countries. Journal of Environmental Management, 188:183– 194.

Adekunle, O., Salami, G., and Oluseyi, A. (2013). Impact of Financial Sector Development on the Nigerian Economic Growth. American Journal of Business and Management, 2(4):347–356.

Aderibigbe, J. (2001). The role of the financial sector in poverty reduction. CBN Economic and Financial Review, 39 (3):1–19.

Al-mulali, U., Fereidouni, H. G., Lee, J. Y., and Sab, C. N. B. C. (2013). Exploring the relationship between urbanization, energy consumption, and CO2 emission in MENA countries. Renewable and Sustainable Energy Reviews, 23:107–112.

Al-mulali, U. and Sab, C. N. B. C. (2012). The impact of energy consumption and CO2 emission on the economic and financial development in 19 selected countries. Renewable and Sustainable Energy Reviews, 16(7):4365–4369.

Alam, A., Azam, M., Abdullah, A. B., Malik, I. A., Khan, A., Hamzah, T. A. A. T., Faridullah, Khan, M. M., Zahoor, H., and Zaman, K. (2015). Environmental quality indicators and financial development in Malaysia: unity in diversity. Environmental Science and Pollution Research, 22(11):8392–8404.

Alege, P. O. and Ogundipe, A. A. (2015). Environmental quality and economic growth in Nigeria: A fractional cointegration analysis. International Journal of Development and Sustainability, 2(2)(2):1–17.

Andreoni, J. and Levinson, A. (2001). The simple analytics of the environmental Kuznets curve. Journal of Public Economics, 80(2):269–286.

Bekhet, H. A., Matar, A., and Yasmin, T. (2017). CO2 emissions, energy consumption, economic growth, and financial development in GCC countries: Dynamic simultaneous equation models. Renewable and Sustainable Energy Reviews, 70:117–132.

Boutabba, M. A. (2014). The impact of financial development, income, energy and trade on carbon emissions: Evidence from the Indian economy. Economic Modelling, 40:33–41.

Central Bank of Nigeria (2017). CBN Annual Report and Statistical Bulletin for the Year Ended 31st December. http://www.cbn.gov.ng/documents/statbulletin.asp. Accessed February 22, 2018.

Charfeddine, L., Al-Malk, A. Y., and Korbi, K. A. (2018). Is it possible to improve environmental quality without reducing economic growth: Evidence from the Qatar economy. Renewable and Sustainable Energy Reviews, 82:25–39.

Charfeddine, L. and Khediri, K. B. (2016). Financial development and environmental quality in UAE: Cointegration with structural breaks. Renewable and Sustainable Energy Reviews, 55:1322–1335.

Copeland, B. R. and Taylor, M. S. (1994). North-South Trade and the Environment*. The Quarterly Journal of Economics, 109(3):755–787.

Dasgupta, S., Laplante, B., and Mamingi, N. (2001). Pollution and Capital Markets in Developing Countries. Journal of Environmental Economics and Management, 42(3):310–335.

Dasgupta, S., Laplante, B., Wang, H., and Wheeler, D. (2002). Confronting the Environmental Kuznets Curve. Journal of Economic Perspectives, 16(1):147–168.

Eregha, P. B. and Mesagan, E. P. (2017). Energy consumption, oil price and macroeconomic performance in energy dependent African countries. Applied Econometrics, 46:74–89.

Frankel, J. A. and Rose, A. K. (2005). Is Trade Good or Bad for the Environment? Sorting Out the Causality. The Review of Economics and Statistics, 87(1):85–91.

Isola, W. and Mesagan, E. (2014). Impact of Oil Production on Human Condition in Nigeria. West African Journal of Monetary and Economic Integration, 14 (1):84–102.

Jalil, A. and Feridun, M. (2011). The impact of growth, energy and financial development on the environment in China: A cointegration analysis. Energy Economics, 33(2):284–291.

Javid, M. and Sharif, F. (2016). Environmental Kuznets curve and financial development in Pakistan. Renewable and Sustainable Energy Reviews, 54:406–414.

Kahouli, B. (2017). The short and long run causality relationship among economic growth, energy consumption and financial development: Evidence from South Mediterranean Countries (SMCs). Energy Economics, 68:19–30.

Karanfil, F. (2009). How many times again will we examine the energy-income nexus using a limited range of traditional econometric tools? Energy Policy, 37(4):1191–1194.

Khan, A., Saleem, N., and Fatima, S. (2018). Financial development, income inequality, and CO2 emissions in Asian countries using STIRPAT model. Environmental Science and Pollution Research, 25(7):6308–6319.

Levine, R. (1996). Foreign banks, financial development, and economic growth. International financial markets: Harmonization versus competition, 7:224–54.

Li, Z., Xu, N., and Yuan, J. (2015). New evidence on trade-environment linkage via air visibility. Economics Letters, 128:72–74.

Mahalik, M. K., Babu, M. S., Loganathan, N., and Shahbaz, M. (2017). Does financial development intensify energy consumption in Saudi Arabia? Renewable and Sustainable Energy Reviews, 75:1022–1034.

Maji, I., Habibullah, M., and Saari, M. (2017). Financial development and sectoral CO2 emissions in Malaysia. Environmental Science and Pollution Research, 24(8):7160–7176.

Mesagan, E., Isola, W., and Ajide, K. (2018). The capital investment channel of environmental improvement: evidence from BRICS. Environment, Development and Sustainability, 24:1–22.

Mesagan, E. P. (2015). Economic growth and carbon emission in Nigeria. The IUP Journal of Applied Economics, XIV(4):61–75.

Moghadam, H. E. and Dehbashi, V. (2018). The impact of financial development and trade on environmental quality in Iran. Empirical Economics, 54(4):1777–1799.

Nasreen, S., Anwar, S., and Ozturk, I. (2017). Financial stability, energy consumption and environmental quality: Evidence from South Asian economies. Renewable and Sustainable Energy Reviews, 67:1105–1122.

Nwilo, P. C. and Badejo, O. T. (2006). Impacts and management of oil spill pollution along the Nigerian coastal areas. Administering Marine Spaces: International Issues, 119:1–15.

Omri, A., Daly, S., Rault, C., and Chaibi, A. (2015). Financial development, environmental quality, trade and economic growth: What causes what in MENA countries. Energy Economics, 48:242–252.

Ozturk, I. and Acaravci, A. (2013). The long-run and causal analysis of energy, growth, openness and financial development on carbon emissions in Turkey. Energy Economics, 36:262–267.

Paul, S. and Bhattacharya, R. N. (2004). CO2 emission from energy use in India: a decomposition analysis. Energy Policy, 32(5):585–593.

Pesaran, M. H. and Shin, Y. (1998). An autoregressive distributed-lag modelling approach to cointegration analysis. Econometric Society Monographs, 31:371–413.

Pesaran, M. H., Shin, Y., and Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3):289–326.

Sadorsky, P. (2011). Financial development and energy consumption in Central and Eastern European frontier economies. Energy Policy, 39(2):999–1006.

Sadorsky, P. (2014). The effect of urbanization on CO2 emissions in emerging economies. Energy Economics, 41:147–153.

Saidi, K. and Mbarek, M. B. (2017). The impact of income, trade, urbanization, and financial development on CO2 emissions in 19 emerging economies. Environmental Science and Pollution Research, 24(14):12748–12757.

Salahuddin, M., Alam, K., Ozturk, I., and Sohag, K. (2018). The effects of electricity consumption, economic growth, financial development and foreign direct investment on CO2 emissions in Kuwait. Renewable and Sustainable Energy Reviews, 81:2002–2010.

Shahbaz, M., Hoang, T. H. V., Mahalik, M. K., and Roubaud, D. (2017). Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis. Energy Economics, 63:199–212.

Shahbaz, M., Hye, Q. M. A., Tiwari, A. K., and Leitao, N. C. (2013). Economic growth, energy consumption, financial development, international trade and CO2 emissions in Indonesia. Renewable and Sustainable Energy Reviews, 25:109–121.

Shahbaz, M., Sbia, R., Hamdi, H., and Ozturk, I. (2014). Economic growth, electricity consumption, urbanization and environmental degradation relationship in United Arab Emirates. Ecological Indicators, 45:622–631.

Solarin, S. A., Al-Mulali, U., Musah, I., and Ozturk, I. (2017). Investigating the pollution haven hypothesis in Ghana: An empirical investigation. Energy, 124:706–719.

Soytas, U., Sari, R., and Ewing, B. T. (2007). Energy consumption, income, and carbon emissions in the United States. Ecological Economics, 62(3):482–489.

Stern, D. I. (2004). The Rise and Fall of the Environmental Kuznets Curve. World Development, 32(8):1419–1439.

World Bank (2016). New Data Reveals Uptick in Global Gas Flaring. http://www.worldbank.org/en/news/press-release/2016/12/12/new-data-reveals-uptick-in-global-gas-flaring. Accessed July 11, 2018.

World Development Indicators (2017). The World Bank Databank. http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators. Accessed February 10, 2017.