Revisiting the Energy-Finance-Carbon Nexus: Evidence from Westerlund Cointegration and PCSE Estimation

Abstract

This study revisits the energy-finance-carbon nexus in the Economic Cooperation Organization (ECO) economies during the period 1993-2024. Using second-generation panel econometric analysis, namely, the Westerlund cointegration tests, and the Prais-Winsten regressions with the panel-corrected standard error (PCSE), the study examines the long-run interplay between energy consumption, financial development, urbanization, trade openness, and carbon emissions. Further, for robustness, we also applied the Fully Modified Ordinary Least Squares (FMOLS) method. The empirical findings show that energy consumption has a statistically significant effect on carbon emissions, confirming the region's dominance of fossil fuel use. In contrast, financial development has a statistically significant negative impact on carbon emissions, suggesting that developed financial systems promote green investment and technological advancement. Moreover, urbanization and trade openness both exert statistically positive effects on CO2 emissions. These results highlight the importance of sustainable financial reform and energy transition policies for environmental sustainability in ECO countries. The paper therefore provides policy recommendations for entrenching green finance as a national development approach.

Keywords

Energy Consumption; Financial Development; Carbon Emissions; PCSE