Exploring the Nexus between Financial Development and Environmental Impact in Saudi Arabia

Abstract

This study adds to the existing literature by exploring the impact of financial development on carbon dioxide emissions in Saudi Arabia over the period from 1970 to 2019. The findings reveal several important dynamics in the relationship between financial development, economic growth, electricity consumption, exports, and carbon dioxide emissions. Firstly, the study shows that financial development contributes to an increase in carbon dioxide emissions. This suggests that as the financial sector expands, it potentially facilitates more industrial activities and investments that lead to higher emissions. However, the relationship between financial development and carbon dioxide emissions is not linear; instead, it is U-shaped. Initially, financial development helps reduce carbon dioxide emissions, possibly due to increased investments in cleaner technologies and more efficient resource utilization. Over time, however, as financial development progresses further, emissions start to rise again. This increase could be attributed to relaxed environmental regulations and a greater focus on economic growth at the expense of environmental considerations. Secondly, the study finds that economic growth tends to reduce carbon dioxide emissions in Saudi Arabia. This might indicate that as the economy grows, there is a shift towards more efficient production processes and the adoption of cleaner technologies, which help mitigate environmental impacts. The impact of electricity consumption on carbon dioxide emissions is found to be positive. This is expected, given that increased electricity consumption often leads to higher emissions, especially if the electricity is generated from fossil fuels. As Saudi Arabia's electricity consumption grows, so do its carbon dioxide emissions, highlighting the need for a transition to cleaner energy sources. Exports are also shown to boost carbon dioxide emissions. This suggests that the production of goods for export markets contributes significantly to the country's overall emissions. The increase in industrial activity and energy consumption required to meet export demands likely drives this relationship. Given the environmental challenges posed by growing electricity consumption, financial development, and exports, Saudi Arabia should continue to enforce and possibly strengthen its environmental laws. This includes promoting investments in renewable energy, enhancing energy efficiency standards, and ensuring that industrial and financial growth does not come at the expense of environmental degradation. By doing so, Saudi Arabia can achieve a balance between economic development and environmental sustainability, improving the overall quality of life for its citizens while contributing to global efforts to combat climate change.