Azza Abdillah Saleh, Issa Moh’d Hemed
The findings indicate that financial development raises emissions by 0.1359% and 1.058% for each percentage change in DCPS and BM, respectively, which is consistent with a linear relationship.
The study examines the influence of financial development, measured using two indicators: Domestic Credit to Private Sector (DCPS) and Broad Money (BM), on Carbon dioxide (CO2) emissions in Tanzania, accounting for both linear and non-linear correlations. It also examines the moderating role of Foreign Direct Investment (FDI) and economic growth (GDP) in this connection. The Autoregressive Distributed Lag (ARDL) technique was used to analyse yearly time series data from 1989 to 2022. The findings indicate that financial development raises emissions by 0.1359% and 1.058% for each percentage change in DCPS and BM, respectively, which is consistent with a linear relationship. However, when nonlinearity is included, the connection becomes U-shaped and marks the turning point at 7.162% for DCPS and 35.06% for BM, which both support the EKC theory. Furthermore, the interaction effects show that financial development can lower emissions by 0.165% (DCPS) and 0.504% (BM) when interacted with FDI inflows and by 0.47% (DCPS) and 3.51% (BM) when linked with GDP. The diagnostic tests confirm that the estimated models are free from heteroscedasticity, satisfy the normality assumption, and show no evidence of model misspecification based on the Ramsey RESET test. Overall, the findings emphasise that the environmental consequences of financial development depend on how the financial resources are allocated and combined with other economic factors. The report advises improving green finance and aligning financial policies with sustainable development plans.