Green Finance, Renewable Energy, and CO₂ Emissions in South Asia: The Moderating Role of Natural Resources and the Importance of Cross-Sectional Dependence Correction

Abstract

This paper examines how individual and interactive factors, such as green finance, renewable energy consumption, and total natural resource rents influence CO₂ emissions in South Asian countries, employing annual panel data spanning the time period 2004 to 2022 in four countries. Using cross-sectional dependence and serial autocorrelation corrected Driscoll–Kraay two-way fixed effects estimator, we find that, remarkably, green finance, natural resource rents from renewables and total natural resource rents all have statistically significant negative impacts on CO₂ emissions, whereas FDI, GDP growth and urban population have statistically significant positive impacts. Most importantly, the interaction terms of the green finance with renewable energy consumption (GF_REC) and with natural resource rents (GF_TNR) both appear positive and significant moderators, suggesting that green finance acts as a facilitator of emissions indirectly in both cases when it is not combined with other emissions reduction measures. The results are particularly relevant for the architecture of climate finance, resource governance, and designing integrated environmental policies in South Asia.