Financial institutions and CO2 emissions in the G20: Fuel-specific and income-level insights

This study examines how financial institutions influence CO 2 emissions in G20 countries over the period 1994–2021. Although the link between energy use and emissions is well established, evidence on the finance–emission relationship remains mixed. Using the Financial Institutions Index alongside a disaggregated energy mix and macroeconomic controls, we explore how financial development and energy consumption jointly affect emissions. The results indicate that the finance–emissions nexus is heterogeneous across development stages: in high-income or developed economies, stronger financial institutions are associated with lower emissions, consistent with improved capital allocation and greater support for cleaner technologies. In contrast, in developing or upper-middle-income economies, financial expansion is associated with higher emissions, consistent with scale effects and continued reliance on fossil-fuel-based industrial activity. Overall, the findings suggest that green-finance strategies should be tailored to countries’ development conditions and energy structures.