Financial inclusion and the global net-zero emissions agenda: Does governance quality matter?

We inspect the impact of financial inclusion on carbon (CO2) emissions and the role that quality of governance plays using a global dataset from 119 countries between 2004 and 2020. We address endogeneity using the dynamic two-step generalized method of moment estimator and further test the robustness of results using the Driscol-Kraay estimator, which is crucial for addressing cross-sectional and temporal dependence. The findings showed that financial inclusion and quality of governance exhibited a positive and significant impact on CO2 emissions. Further analysis shows that the impact of financial inclusion and governance on CO2 emissions varies across countries at different stages of economic development. We also documented significant variations in the results across six geographical regions. The evidence from moderation and marginal effect analysis revealed that the marginal effect of financial inclusion on CO2 emissions is contingent on governance quality and that improving governance quality (scores) conditions financial inclusion to minimize CO2 emissions across the globe. We, therefore, demonstrate that in countries with relatively higher (better) governance scores, such as the United Kingdom, Denmark, Singapore, and New Zealand, financial inclusion significantly mitigates CO2 emissions compared to countries with relatively lower (weak) governance scores, such as Iraq, Zimbabwe, Ghana, and Chad. Finally, mediation analysis also highlights that the effect of financial inclusion on CO2 emissions is mediated by renewable energy consumption, industrialization, and household consumption. The policy implications are discussed.