THE JOURNAL OF ENERGY

AND DEVELOPMENT

Paul Adjei Kwakwa,

“Energy Consumption, Financial
Development, and Carbon Dioxide Emissions:
A Moderating Analysis for the
Manufacturing and Construction Sector,”
Volume 45, Number 2

Copyright 2021
 ENERGY CONSUMPTION, FINANCIAL
DEVELOPMENT, AND CARBON DIOXIDE
EMISSIONS: A MODERATING ANALYSIS FOR THE
MANUFACTURING AND CONSTRUCTION SECTORS

Paul Adjei Kwakwa*

Introduction

O ne of the greatest environmental challenges confronting the world is the

rising levels of carbon dioxide (CO2) emissions. CO2 emissions are ac-
knowledged to be a leading cause of global warming and climate change. Since the
effects of climate change on the lives of people and economies are enormous, there
is a consensus among many world leaders to limit CO2 emissions. Efforts to
control CO2 emissions have propelled researchers to devote attention to identi-
fying the major emission drivers.1 Thus, we see increased academic focus on
analyzing the emission effects of many economic and non-economic variables.
Energy consumption is one of the key factors often discussed in the literature
with regard to CO2 emissions. Although the importance of energy to the economy
cannot be overemphasized, increased energy consumption leads to higher CO2
emissions. The reason is that fossil fuels constitute the largest share of energy
consumption globally. Moreover, rising energy demand puts pressure on energy
resources and increases extraction of natural resources, which eventually results in

*Paul Adjei Kwakwa is a Senior Lecturer with Presbyterian University College, Ghana, where he
teaches economics and economics-related subjects. His research interests focus on economic growth,
economic development, and environmental and resource economics. His recent articles have been
published in the Journal of Energy and Development, OPEC Energy Review, The International
Journal of Energy Economics and Policy, The Journal of Rural and Industrial Development, and
Renewable and Sustainable Energy Reviews.

The Journal of Energy and Development, Vol. 45, Nos. 1 and 2

Copyright Ó 2021 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
175
176 THE JOURNAL OF ENERGY AND DEVELOPMENT

increased environment pollution. However, owing to the importance of energy in

every sector of the economy, it will be difficult to stop or greatly lessen the re-
liance on energy for the sake of reducing CO2 emissions. This makes it crucial to
ensure that energy is both produced and consumed sustainably. Accordingly, it is
argued there must be efficient ways of using energy, as well as the development of
technologies to enhance renewable energy development.2 The principle is that
consuming energy in an efficient and sustainable manner will reduce the emissions
effect of energy consumption.3
One economic indicator that could affect the efficiency of energy usage is
financial development. Therefore, it is no wonder that in recent times financial
development has garnered greater attention in the energy and environmental
economics literature.4 The literature to date suggests that development of the fi-
nancial sector can reduce CO2 emissions via several means including enabling
households and firms to acquire the necessary funds to purchase energy-efficient
equipment and funding to support research and development of energy-efficient
technologies. However, it is also postulated that financial development can in-
crease CO2 emissions by expanding the consumption activities of households and
firms in addition to supporting the expansion activities of firms that require more
energy, thereby increasing emissions.5
Thus, there is an assertion to be made that financial development could
moderate the CO2 emissions effect of energy consumption. In the energy, financial
development, and environment literature different models have been employed by
researchers to ascertain this salient relationship. For the environmental degrada-
tion studies, some papers have modeled CO2 emissions with many variables that
include energy but exclude financial development,6 or variables that include fi-
nancial development but exclude energy consumption7 or that incorporate both
energy and financial development.8 The empirical results from the above studies
have been mixed with some recording a positive effect of energy and financial
development on CO2 emissions, some recording negative effects, and still others
determining that the effect is insignificant.
Meanwhile, some researchers also have reported uncovering a significant re-
lationship between financial developments and energy consumption. For instance,
S. Saud et al., S. Mukhtarov et al., and A. Ibrahim et al. reported a positive effect of
financial development on energy consumption while M. Gómez and J. Rodrı́guez,
O. Mielnik and J. Goldemberg, and A. Rafindadi found a negative effect of fi-
nancial development on energy consumption.9 H. Ali et al. reports a mixture of
both positive and negative effects of financial development on types of energy
consumption.10 If financial development can influence the level of energy con-
sumption and energy consumption can affect CO2 emissions, it is possible that
financial development can moderate the CO2 emissions effect of energy con-
sumption. However, there remains a shortfall in the existing empirical literature
since past studies have not captured the moderating role of financial development
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 177

on the nexus between energy consumption and CO2 emissions. This identified gap
in the literature is what the present study seeks to bridge.
To achieve the stated objective, this work focuses on CO2 emissions from the
manufacturing industries and construction sectors. The manufacturing industries
and construction sectors play a crucial role in the growth and development process
of economies. Manufacturing has been the path to the development of many
economies. The so-called developed countries could not have attained their eco-
nomic levels without a strong manufacturing sector. Moreover, manufacturing has
supported international trade and created job opportunities for many.11 The con-
struction industry also has supported the growth of countries via the mobilization
and utilization of local human and material resources to develop and maintain
housing and infrastructure that promote employment.12 Furthermore, construction
can affect the ability of a nation to attract foreign investment.13 However, the ac-
tivities associated with the manufacturing and construction sectors often involve the
use of more energy that pollutes the environment through increased CO2 emissions.
It is important to pay attention to the CO2 emissions from the manufacturing
and construction sectors for several reasons. Data from the World Bank’s World
Development Indicators14 reveal that, although global CO2 emissions have been
increasing from about 12.3 million kilotons (kt) in 1967 to 36.1 million kt in 2014,
the CO2 emissions from the manufacturing and construction sectors have gener-
ally seen a downward trend from 29.402 percent of total fuel combustion in 1967
to 16.919 percent of total fuel combustion in 2003. This downward movement
appears to be good news. However, it is still higher than emissions from other
sectors such as residential buildings and commercial and public services, which
also have exhibited a declining trend. Moreover, the CO2 emissions from the
manufacturing and construction sectors have increased in recent years from
16.919 percent in 2003 to 19.96 percent in 2014. If this is not checked, global
efforts to curb CO2 emissions may be difficult.
In this study, the focus is placed on the nation of Ghana. This country provides a
useful case study for other African nations. Ghana was the first country in Sub-
Saharan Africa to gain post-colonialism independence and is ranked as Africa’s
most peaceful country by the Global Peace Index. Additionally, the International
Monetary Fund found Ghana to be one of the world’s fastest growing economies in
2019. The economy possesses a diverse and rich resource base, including the
manufacturing/construction and exportation of digital technology goods, automotive
and ship, as well as the exportation of diverse and rich resources such as hydro-
carbons and industrial minerals. Ghana’s manufacturing and construction sectors
have been part of the success story of the country’s economic growth. Since the early
days of Ghana’s independence, the development of the industrial sector—of which
manufacturing and construction form the essential cornerstones—has been a high
priority on the agendas of successive governments with different incentives enacted
to propel industrial growth. The salience of the manufacturing and construction
178 THE JOURNAL OF ENERGY AND DEVELOPMENT

sectors to Ghana’s economy in terms of growth, job creation, and poverty reduction
have been documented by many including E. Darko and A. Lowe, the Institute of
Statistical, Social and Economic Research, and Oxford Business Group.15 That
notwithstanding, A. Simons et al. recently reported in their study that the
manufacturing and construction sectors contribute significantly to Ghana’s total CO2
emissions.16 As a developing nation, this trend needs to be curbed to avoid worsening
the effect of climate change on the lives of the citizens and the entire economy as a
whole. Although some empirical studies on CO2 emissions in Ghana have been
conducted, the research by P. Adom et al. happens to be the only study that has
incorporated a sectoral analysis for the manufacturing and construction sectors.17
However, the authors did not analyze the moderation effect of financial development
on the energy-carbon emissions nexus.
Therefore, this study makes a number of contributions to the existing body of
literature. First, to the best of the author’s knowledge, it is the only study to assess
the moderation effect of financial development on the energy-carbon emissions
nexus. Also, it is among the few studies to incorporate a sectoral analysis of CO2
emissions other than the usual total CO2 emissions. Few studies, such as P.
Kwakwa et al., P. Adom et al., S. Aboagye, and A. Alper and G. Onur, have
included a sectoral analysis of CO2 emissions for the countries of Tunisia, Ghana,
South Africa, and China, respectively.18 Such an analysis is necessary to offer
policy makers more insight to deal with the threat of CO2 emissions. Moreover, for
the Ghanaian literature, this article is among the few to employ both the autore-
gressive distributed lag (ARDL) and the fully modified ordinary least squares
(FMOLS) techniques in estimating the drivers of CO2 emissions. The rest of the
paper is organized as follows: the second section offers a review of the related
literature; the third section focuses on data and methodological issues; the fourth
section provides the analysis and discussion of the results; and the fifth section
concludes with policy implications and recommendations.

Brief Literature Review

Within the Stochastic Impacts by Regression on Population, Affluence, &

Technology (STIRPAT) framework, environmental degradation including carbon
emissions are argued to be a function of income, population pressure, energy, and
financial development. The income-environment literature indicates that an ex-
pansion in economic activities puts pressure on environmental resources and in-
creases energy consumption, which contributes to raising CO2 emissions. How-
ever, in the long run, growth in an economy can reduce CO2 emissions when the
citizens become conscious of the environmental impact of their activities and then
regard the quality of the environment as a normal good.19 Empirically, K. Ehi-
giamusoe found income to increase carbon emissions for a panel of 31 African
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 179

countries, J. Dar and M. Asif recorded a positive effect of income on carbon

emissions in India, and P. Kwakwa et al. reported the same effect for Ghana.20 On
the other hand, A. Rafindadi and O. Usman found income eventually reduces
carbon emissions for the South African economy, S. Adams et al. found income
reduces CO2 emissions in Ghana, and M. Shahbaz et al. noted a negative rela-
tionship between income and CO2 emissions in Australia.21
Population pressure, especially growth in urban population, is associated with
heavy vehicular traffic, job opportunities, and high consumption of goods and
services that often put stress on energy resources and, ultimately, lead to a higher
level of carbon emissions.22 The need for more housing spaces for residential and
non-residential uses in urban areas sometimes leads to the clearing of forest veg-
etation to make way for building construction. This, in turn, is associated with a
higher level of carbon emissions. On the other hand, it is argued that the concen-
tration of people in an area leads to innovative ways of using the available scarce
resources more efficiently, which, in theory, will reduce carbon emissions.23 While
P. Kwakwa and G. Adu, P. Kwakwa and H. Alhassan, A. Sinha et al., and D.
Ekwueme and J. Zoaka found urbanization to positively affect carbon emissions for
Sub-Saharan African countries, Ghana, N-11 economies (Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, Turkey, South Korea,
and Vietnam), and MENA countries, respectively, M. Salahuddin et al. found a
negative effect of urbanization on carbon emissions for South Africa and D. Tang
et al. reported urbanization reduces carbon emissions for the Yangtze River Eco-
nomic Belt in China.24 Moreover, K. Li and B. Lin found a mixture of positive and
negative effects of urbanization on carbon emissions for 73 countries.25
Higher energy consumption usually leads to higher CO2 emissions because of
the emissions from greenhouse gases (GHGs) associated with its combustion.26
Thus, the burning of fossil fuels for electricity and other activities harms the en-
vironment since more GHGs will be emitted. Increasing energy demands for
residential and non-residential uses imply extraction and burning of more fossil
fuels for energy, which results in higher carbon emissions. In this regard, when a
country’s energy is dominated by fossil fuels, higher energy demand will lead to
higher carbon emissions than when renewable energy sources are the dominant
supply source. The empirical studies have largely found energy consumption to
increase carbon emissions. For instance, M. Agboola and V. Bekun found energy
increases carbon emissions for the Nigerian economy, I. Yasin et al. reported a
positive effect of energy consumption on CO2 emissions for both developed and
developing countries, A. Gill et al. found a similar outcome for Malaysia in the
short run, P. Kwakwa et al. also determined a positive effect between energy
consumption and carbon emissions for Ghana, and M. Salahuddin et al. reported a
positive effect of energy in Kuwait.27
Similarly, the argument about the direction of financial development on carbon
emissions is mixed in the academic literature. A school of thought contends that
180 THE JOURNAL OF ENERGY AND DEVELOPMENT

financial development can reduce carbon emissions by making funds available for
households and firms to purchase more energy-efficient equipment and devices.28
Furthermore, it can also reduce carbon emissions by promoting research and de-
velopment of energy-efficient technologies.29 The counter argument is that fi-
nancial development empowers households and firms, financially, to increase
their consumption activities, which require more energy thereby increasing carbon
emissions.30 Research findings and evidence also have supported mixed results.
For instance, M. Abbasi et al. recorded a positive effect of financial development
on carbon emissions for eight Asian countries as did M. Salahuddin et al. for
Kuwait and P. Kwakwa et al. for Tunisia, which suggests that as financial de-
velopment increases so do carbon emissions.31 On the other hand, D. Ekwueme
and J. Zoaka and P. Adom et al. found financial development reduces carbon
emissions in MENA countries and Ghana, respectively, while I. Yasin et al. re-
ported financial development leads to increasing carbon emissions for developed
countries but reduces emissions for developing countries.32
Some recent studies on carbon emissions have included interaction terms for
the drivers of carbon emissions. The aim is to ascertain the possibility of a
moderation effect between two of the factors on carbon emissions. The fol-
lowing articles are among those works that examined the role of various fac-
tors’ moderating effects on carbon emissions: R. York and J. McGee examined
energy and the income-emission nexus, P. Kwakwa and H. Alhassan assessed
the effects of urbanization and energy consumption, K. Ehigiamusoe analyzed
the effects of tourism and economic growth, S. Katircioglu et al. evaluated
education and energy consumption, and K. Ehigiamusoe et al. measured the
effects of income and energy consumption.33 A. Gill et al. focused on the
moderation role financial development has on income while A. Sinha et al.
examined biomass energy consumption and income.34 Additionally, S. Adams
et al. analyzed the interactive effects between urbanization and democracy,
while in two separate works by D. Balsalobre-Lorente et al. the authors studied
the interaction effects between energy use and income, the effects between
corruption and energy, and the effects between corruption and income.35 Al-
though significant interaction effects have been recorded for the aforemen-
tioned studies, attention is yet to be given to the moderating role financial
development plays in the energy-carbon emissions nexus. Accordingly, this
study seeks to investigate the moderating role of financial development on the
energy-carbon emissions nexus.

Methods

Theoretical and Empirical Specifications: This study employs the well-

known Stochastic Impacts by Regression on Population, Affluence, & Technology
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 181

(STIRPAT) model, which argues that environmental degradation is a function of

affluence, population, and technology. Mathematically, this can be expressed as:

I ¼ a:Pb :Al :T s :e ð1Þ

where I is the environmental impact, P is population pressure, A is affluence, and

T is technology. The variables a, b, l, s, d, and e are parameters to be estimated.
In this study, environmental impact is denoted by CO2 emissions from the
manufacturing and construction sectors (CO), the population variable is captured
by urbanization population (UB), and affluence is denoted by income (YC). Fol-
lowing the works of S. Paramati et al.36 technology is represented by financial
development (FD) and energy (EN). This will then translate equation (1) into
equation (2):

CO ¼ a:UBb :YC l :EN s :FDd :e ð2Þ

The post-transformation form of equation (2) after the logarithmic application is

given as:
LCO ¼ a þ bLUB þ lLYC þ sLEN þ dLFD þ e ð3Þ

Since the study seeks to examine the moderation effects of financial development
on energy consumption, equation (3) is modified to include the interactive term for
financial development and energy (LEN * LFD) as below:
LCO ¼ a þ bLUB þ lLYC þ sLEN þ dLFD þ uLEN *LFD þ e ð4Þ

From equation (4), a positive coefficient for energy consumption (s > 0) and a
negative coefficient for the interaction between energy consumption and financial
development (u < 0) imply energy consumption increases carbon emissions while
financial development reduces the detrimental effect energy has on carbon
emissions. If s < 0 and u > 0 it means energy consumption improves the quality of
the environment via low carbon emissions, but financial development dampens
that effect by increasing the carbon emissions associated with energy consump-
tion. If s < 0 and u < then it means energy consumption reduces carbon emissions
and financial development reinforces that reducing effect. Lastly if s > 0 and u >
it indicates energy consumption increases carbon emissions and this is reinforced
by financial development.
Data and Estimation Techniques: The study uses annual time-series data
covering the period 1971–2014, which was sourced from the World Bank’s World
182 THE JOURNAL OF ENERGY AND DEVELOPMENT

Development Indicators.37 The choice of this period was based on data avail-
ability. The dependent variable CO2 emissions is measured by the CO2 emissions
from manufacturing industries and construction (% of total fuel combustion).
Income is represented by gross domestic product (GDP) per capita while urban-
ization population is represented by total urban population. Financial development
is measured by the domestic credit provided by the financial sector while energy
consumption is measured by primary energy use.
Time-series analysis requires variables are stationary to avoid getting spurious
regression results. In this study, the popular Zivot-Andrews unit root test is
employed to assess the stationarity properties of the variables. This particular test
is preferred to the augmented Dickey-Fuller (ADF) and the Phillips-Perron (PP)
since it offers reliable results in the presence of structural breaks. Even though
time-series variables may not be stationary, a long-run relationship is likely to
exist among them. As a result, following the unit root test, the autoregressive
distributed lag (ARDL) cointegration technique is employed to ascertain the long-
run relationship between the variables. The study then proceeds to ascertain the
long-run and short-run effects of the selected variables on CO2 emissions. For the
long-run analysis the fully modified OLS (FMOLS) regression method, which can
handle the problem of simultaneity bias and correlation among variables and the
ARDL technique which is best for a mixture of variables integrated of orders 0 and
1 are employed. Another advantage of the ARDL technique is that it enables one to
estimate the short-run effect. Consequently, it is used to analyze the short-run
effect of energy, financial development, income, and urbanization on CO2
emissions.
To have a robust result, further investigations are done to ascertain the causal
relationship among the variables and to analyze the contribution of each of the
explanatory variables to changes in CO2 emissions over a period of time. Thus, the
Toda-Yamamoto causality analysis and the variance decomposition analysis are
employed, respectively, to assess the causal relationship among the variables and
the contribution of each of the explanatory variables to changes in CO2 emissions
over a period of time.

Results and Discussion

This section presents and discusses the results of the econometric techniques
employed in this study. It specifically reveals results for unit root and cointe-
gration tests, long-run and short-run regression results, and results for causality
and variance decomposition analysis.
Unit Root and Cointegration Results: The Zivot-Andrews unit root test re-
sults reported in table 1 indicate the series are a mixture of I(0) and I(1) variables.
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 183

Table 1
a
UNIT ROOT TEST RESULTS

Series Level Breakpoint At First Difference Breakpoint

LMCO –4.4962 1981 –7.2818*** 1982

LEN –4.6851 1999 –6.5179*** 2005
LYPC –3.2054 2001 –5.4504*** 1986
LUB –6.1605*** 2007 –7.5319*** 2000
LFD –4.6279 1991 –7.5319*** 2000

a
*** = denotes 1-percent level of significance. LMCO = logarithmic form of CO2 emissions from
manufacturing industries and construction, LEN = logarithmic form of energy consumption, LYPC =
logarithmic form of income, LUB = logarithmic form of urbanization, LFD = logarithmic form of
financial development.

One can see that, with the exception of urbanization that is stationary at levels, all
the other variables become stationary at first difference. The implication is the
variables can be used for regression analysis without providing a spurious out-
come. The cointegration results using the ARDL approach reported in table 2
indicate there is a long-run relationship between CO2 emissions from the
manufacturing and construction sectors and income, urbanization, financial de-
velopment, and energy consumption.
Long-Run and Short-Run Regression Results: The long-run analysis utilized
the ARDL and FMOLS regression results while the short-run analysis employed
the ARDL technique. In table 3 the results for the long-run regression analysis are
reported. One can see that both the ARDL and the FMOLS techniques give similar
results. The outcome is that energy, income, urbanization, financial development,
and the interaction between energy consumption and financial development sig-
nificantly affect the level of carbon emissions from the manufacturing and con-
struction sectors.
The results show a positive relationship between energy consumption and
carbon emissions. That is increasing the level of energy consumption and drives
carbon emissions up in the long run. The plausibility of this result can be attributed
to the fact that manufacturing and construction activities thrive on energy.
However, since fossil fuel consumption constitutes a significant part of energy
consumption, the higher level of energy usage by firms in the sector leads to higher
carbon emissions.
The significance of energy in Ghana’s manufacturing sector is highlighted
whenever the country experiences energy crises that result in the sector
184 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 2
a
AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) COINTEGRATION TEST RESULTS

LMCO,|LEN,LYPC,LUB,LFD, F-stat =
LEN*LFD 5.5415***
Significance I(0) bound I(1) bound
10% 2.26 3.35
5% 2.62 3.79
1% 3.41 4.68

a
*** = denotes 1-percent level of significance. LMCO = logarithmic form of CO2 emissions from
manufacturing industries and construction, LEN = logarithmic form of energy consumption, LYPC =
logarithmic form of income, LUB = logarithmic form of urbanization, LFD = logarithmic form of
financial development.

experiencing a reduction in growth.38 The positive effect of energy on carbon

emissions from the manufacturing sector is similar to earlier findings.39
Again, in the long run, income has a positive effect on carbon emissions. A
higher level of income in an economy has the potential to increase the purchasing
power of consumers. In this regard, there may be a surge in demand for processed

Table 3
a
LONG-RUN ESTIMATION RESULTS

ARDL FMOLS
Variable Coefficient t-statistic Coefficient t-statistic

LEN 7.3808** 2.1920 8.0127** 2.0698

LYPC 0.5031*** 2.8337 0.7335*** 4.4020
LUB –0.3395*** –4.4193 –0.4378*** –6.3083
LFD 13.5028** 2.2311 14.8080** 2.1221
LEN*LFD –2.3136** –2.2297 –2.5137** –2.1038
C –38.2099 –1.9608 –42.7934* –1.9055

a
***, **, and * = denotes significance at the 1-pecent level, 5-percent level, and 10-percent level,
respectively. LEN = logarithmic form of energy consumption, LYPC = logarithmic form of income,
LUB = logarithmic form of urbanization, LFD = logarithmic form of financial development, C =
constant; ARDL = autoregressive distributed lag; and FMOLS = fully modified ordinary least
squares.
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 185

goods. Thus, the scale and composition of processed goods together with building
construction may increase with income, which, in turn, may require more energy
and, ultimately, increase carbon emissions. This indicates an expansion in Ghana’s
economy has occurred at the expense of environment quality as was also found in
the work of P. Adom et al.40
The results also show that urbanization has a negative effect on the level of
carbon emissions from the manufacturing and construction sectors. This reveals
that an increase in the urban population in Ghana has helped improve the quality of
the environment, specifically by reducing carbon emissions from the
manufacturing and construction sectors. The outcome is in line with the compact
theory of urbanization. Like many countries, Ghana’s manufacturing and con-
struction firms have concentrated in urban towns where there is pressure on re-
sources. It is this pressure on scarce resources that might have propelled firms to
be more efficient with the usage of resources including energy, thereby, reducing
the spate of carbon emissions from the sector. Additionally, it could be that urban
authorities have been more aggressive to ensure manufacturing and construction
firms comply with environmental regulations. In their empirical studies, M Salahuddin
et al. and D. Tang et al. reported urbanization reduces carbon emissions.41
Our results confirm that financial development worsens environment quality
via carbon emissions from the manufacturing sector. An increase in financial
development by 1 percent increases carbon emissions from the sector by about
13.5 to 14.8 percent in the long run. This is an indication that the development of
the financial sector has enabled firms to access credit for their expansionary ac-
tivities leading to more carbon emission.42 This could mean that the financial
sector in Ghana has not been environmentally conscious of the credit they give
out. However, when energy is interacted with financial development, the positive
impact of energy becomes negative and significant. The indication is that although
financial development on its own may increase carbon emissions, its interaction
with energy usage reduces carbon emissions. It eventually reduces the emission
effect of energy by about 2.3 to 2.5 percent in the long run. Thus, financial de-
velopment negatively moderates the impact of energy consumption on carbon
emissions associated with the manufacturing and construction sectors. This is a
confirmation of the suspicion that if financial development can influence the level
of energy consumption and energy consumption can affect CO2 emissions it is
possible financial development can moderate the CO2 emission effect of energy
consumption. The implication is that financial development dampens the carbon
emission effect associated with energy consumption in Ghana’s manufacturing
and construction sectors. This could be that the development of the financial sector
enables firms in the sectors to acquire energy efficient technology for their op-
erations. The results suggest the country can take advantage of financial devel-
opment to curb carbon emissions associated with the manufacturing and con-
struction sectors.
186 THE JOURNAL OF ENERGY AND DEVELOPMENT

In table 4, the short-run analysis results are reported, and it reveals findings that
are similar to that of the long-run analysis. That is, in the short run, energy con-
sumption, income, and financial development have positive effects on carbon
emissions from the manufacturing sector, while urbanization and the interaction
between financial development and energy consumption reduce carbon emissions.
This reinforces the effects of income, energy consumption, urbanization, and fi-
nancial development on the level of carbon emissions from the sector. The error
correction term (ECT–1) has a value of –1.0425 percent, which is significant at the
1-percent level. This implies about 104 percent of the deviations from equilibrium
in the short run are corrected towards the long-run equilibrium every year. It also
provides further evidence of the cointegration associated with the variables. The
diagnostic tests to ensure the robustness of the regression results are reported in
table 4. In all, results from the Jarque-Bera test, Breusch-Godfrey test, Harvey test,

Table 4
a
SHORT-RUN ESTIMATION RESULTS

Variable Coefficient t-statistic

D(LEN) 7.6947** 2.0981

D(LYPC) 0.5245** 2.6010
D(LUB) –10.9070** –2.1088
D(LFD) 14.0771** 2.1377
D(LEN*LFD) –2.4119** –2.1367
ECT(-1) –1.0425*** –6.3858

Diagnostic test
Test Chi-square Probability
Normality: Jarque-Bera 1.7889 0.4088
Serial corr: Breusch-Godfrey 0.2549 0.8803
Heteroskedasticity: Harvey 3.7343 0.8093
F-statistic Probability
Stability: Ramsey 1.9763 0.1373

a
*** and ** = denotes significance at the 1-pecent level and 5-percent level, respectively. LEN =
logarithmic form of energy consumption, LYPC = logarithmic form of income, LUB = logarithmic
form of urbanization, LFD = logarithmic form of financial development, and ECT(-1) = error
correction term.
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 187

and Ramsey test suggest the results are robust since the residual terms do not suffer
from the problems of non-normality, autocorrelation, heterosckedasticity, and
model instability.
Causality and Variance Decomposition Analysis: To ascertain the causality
among the variables, the Toda-Yamamoto causality analysis was undertaken. The
results reported in table 5 shows income, energy, urbanization, financial devel-
opment, and the interaction between energy and financial development Granger
cause carbon emissions from the manufacturing and construction sectors, which
supports the regression results. Again, bidirectional causality between income and
urbanization, income and financial development, income, and carbon emissions,

Table 5
a
TODA-YAMAMOTO CAUSALITY ANALYSIS

Dependent variable

LEN LYPC LUB LFD LMCO LEN*LFD

LEN
42.9777*** 6.9499 148.1771*** 30.8329*** 2801.016***

LYPC
6.0802 16.3000*** 70.4721*** 39.6874*** 1123.855***

LUB
3.5683 258.491*** 173.1913*** 50.4730*** 3464.613***

LFD
1.7173 64.1068*** 4.9854 32.3608*** 3072.267***

LMCO
3.3132 141.1104*** 56.3465*** 114.1178*** 2340.136***

LEN*LFD
1.6883 62.0084*** 4.9002 157.1114*** 32.5980***

a
*** denotes significance at the 1-pecent level. LEN = logarithmic form of energy consumption,
LYPC = logarithmic form of income, LUB = logarithmic form of urbanization, LFD = logarithmic
form of financial development, and LMCO = logarithmic form of CO2 emissions from manufactur-
ing industries and construction.
188 THE JOURNAL OF ENERGY AND DEVELOPMENT

as well as income and the interaction effect between energy and financial de-
velopment are established. Another bidirectional relationship is found for carbon
emissions and all the variables with the exception of energy consumption, where
the direction moves from energy to carbon emissions. Then again, a feedback
effect exists for financial development and all the other variables with the ex-
ception of energy consumption where the direction moves from energy to financial
development. The general implication is that policies to address carbon emissions
in the manufacturing and construction sectors that may influence the level of
income, urbanization, and financial development will have some feedback effects.
Another analysis the study conducted was the variance decomposition analysis,
which tells the contribution of each of the explanatory variables to shocks in
carbon emissions. The results are reported in table 6. Over a ten-year period, the
results from the variance decomposition analysis indicate that, for every one
standard deviation shock, the contribution of all variables to the level of carbon
emissions increases with time with the exception of energy consumption. Al-
though the share of carbon emissions to its level decreases by the 10th period, it
contributes a greater 64.5 percent of carbon emissions.
The share of income increases from 3.5 percent in the second period and by the
tenth period it contributes to about 13 percent of the level of carbon emissions. The
contribution of urbanization also increases from 0.0006 percent in period two to
0.0076 percent in period ten. Comparatively, the share of urbanization is the
smallest among all the variables. This confirms the long-run regression results
reported in table 3 where urbanization has the smallest coefficient among the
factors studied. Although among the explanatory variables energy consumption
has the greatest share, its contribution declines from 14.7 percent in period two to
14.1 percent in period ten, while financial development sees its share increase
from 0.42 percent to 3.8 percent within the same period. The share of the inter-
action between energy and financial development also increases such that by the
tenth period it contributes 4.8 percent to the level of carbon emissions.

Conclusion and Policy Implications

The current study has analyzed the effect of income, urbanization, energy
consumption, and financial development on carbon emissions from the
manufacturing and construction sectors within the STIRPAT model. This paper
augments the existing literature by testing the moderation effect financial devel-
opment plays in the energy-carbon emissions nexus for Ghana using data for the
1971-2014 period. The relationship is analyzed using the ARDL and FMOLS
regression techniques. The empirical results show that, in the long run, income,
energy consumption, and financial development exert upward pressure on carbon
emissions from the manufacturing and construction sectors while urbanization
 ENERGY, FINANCIAL DEVELOPMENT, & EMISSIONS 189

Table 6
a
VARIANCE DECOMPOSITION ANALYSIS

S.E. LMCO LEN LYPC LUB LFD LEN*LFD

Period 1
0.138731 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000

Period 2
0.154607 81.13957 14.71295 3.496634 0.000613 0.427130 0.223102

Period 3
0.158245 79.21216 14.29837 3.339118 0.001165 1.317477 1.831707

Period 4
0.164020 77.07451 13.83144 5.393138 0.002670 1.889392 1.808852

Period 5
0.168101 73.43312 13.96274 7.596012 0.002935 2.222383 2.782807

Period 6
0.171795 70.30986 14.48030 9.118819 0.002837 2.664559 3.423627

Period 7
0.174512 68.18738 14.66809 10.48498 0.005173 2.952030 3.702355

Period 8
0.176623 66.57394 14.53333 11.59482 0.007412 3.192919 4.097571

Period 9
0.178244 65.37755 14.34109 12.29161 0.007683 3.487430 4.494644

Period 10
0.179476 64.49660 14.16047 12.70153 0.007636 3.820095 4.813673

a
S.E. = forecast error, LMCO = logarithmic form of CO2 emissions from manufacturing
industries and construction, LEN = logarithmic form of energy consumption, LYPC = logarithmic
form of income, LUB = logarithmic form of urbanization, and LFD = logarithmic form of financial
development.
190 THE JOURNAL OF ENERGY AND DEVELOPMENT

reduces carbon emissions. It was further seen that financial development, how-
ever, has a negative moderation effect on the carbon emissions effect of energy
consumption. A similar pattern of results was recorded for the short run. A further
investigation from Toda-Yamamoto causality analysis reveals income, energy,
urbanization, financial development, and the interaction between energy and fi-
nancial development affects the level of carbon emissions from the manufacturing
and construction sectors, which supports the regression results. Moreover, a var-
iance decomposition analysis indicates the contribution of all variables to the level
of carbon emissions increases with time with the exception of energy
consumption.
The findings offer a number of policy implications. First, the positive effect of
income on carbon emissions from the manufacturing sector suggests the desire to
witness a higher income level through manufacturing activities has been pursued
at the expense of environmental quality. Authorities in the country need to pay
attention to this phenomenon and enforce a growth and development agenda that is
environmentally friendly. The positive effect of energy consumption on carbon
emission calls for the need to promote conservation policies among manufacturing
and construction firms in the nation. In addition to that, the development of re-
newable energy in the country should be pursued aggressively. The share of non-
renewable energy in Ghana’s energy consumption mix has become dominant in
recent times. Although there are opportunities to increase renewable energy
production via the country’s bodies of water (hydroelectric) and sunlight (solar),
the pace of development has been slow due to cost impediments. It is important for
the government of Ghana to be more committed to renewable energy development
in the coming years to reduce the CO2 emissions effect of energy consumption in
the country. Although financial development increases carbon emissions, it helps
to reduce the positive effect energy consumption has on carbon emissions. This
implies an expansion in the financial sector has the potential to address the threat
of CO2 emissions. However, this requires authorities to put measures in place that
will make financial institutions be more prudent in their credit and lending de-
cisions. It is about time financial institutions in the country provided more funds to
support research into the development of energy-efficient technologies as well as
renewable energy.
NOTES
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