The Effect of Lending Rate on Carbon Emissions in Nigeria

Abstract

Most previous studies on financial development and carbon emissions have typically omitted the role of lending rate, thereby creating a knowledge gap in literature.   The study therefore provides a new insight into how financial development impact carbon emissions with emphasis on lending rates. Specifically, we examine the direct effect of lending rates on carbon emissions using fully modified ordinary least squares and probe the possible symmetric effect using the nonlinear autoregressive distributed lag model.  The results from fully modified OLS show that lending rate reduces carbon emissions. The nonlinear ARDL results confirm symmetry in the short-run and asymmetry in the long-run. The results show that lending rate reduces carbon emissions. Credit to the private sector-GDP ratio and energy intensity improve environmental quality in the short run but increases carbon emissions in the long run. An increase in per capita income leads to an increase in carbon emissions, while urbanization and trade openness reduce them. Essentially, policymakers need to consider the issues of nonlinearity in the formulation of lending rate policies that will assist in reducing pollution in Nigeria. It particular, optimal lending rate must be attained, while promoting the adoption of efficient and environmentally friendly technologies that will facilitate attainment of the same or even higher output level coupled with a reduction in carbon emissions in the long run.