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The decline in energy intensity: Does financial development matter?

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  • Chen, Zhongfei
  • Huang, Wanjing
  • Zheng, Xian

Abstract

Global energy intensity has decreased significantly during the past two decades. Against this background, this study aims to investigate a novel relationship between development of the financial system (financial development) and energy intensity and explore the underlying mechanisms influencing the relationship between these two indicators. Using long-term country-level data and a two-way fixed-effect model, this study reveals that financial development exerts a significant negative effect on energy intensity for non-OECD countries. However, financial development has a limited impact on energy reduction for OECD countries as a result of the mature financial systems of these developed economies. The estimated results are robust for various specifications. In addition, we reveal a U-shaped relationship between financial development and energy intensity in developing countries. Our results suggest that the influence of financial development on energy intensity reduction can be achieved through technological progress and innovation. Our findings suggest that stimulating financial development is an efficient way to reduce national energy intensity, and specific long-term policies must be established in order to balance the trade-off between financial development, economic growth, and energy intensity.

Suggested Citation

  • Chen, Zhongfei & Huang, Wanjing & Zheng, Xian, 2019. "The decline in energy intensity: Does financial development matter?," Energy Policy, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:enepol:v:134:y:2019:i:c:s0301421519305324
    DOI: 10.1016/j.enpol.2019.110945
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