Do innovation, financial development and institutional quality matter in managing carbon risk?

Abstract

Using territorial- and consumption-based carbon emissions as proxies for carbon risk, the study examined the impact of innovation on carbon risk while controlling for institutional quality and financial development effects in the BRICS countries (Brazil, Russia, India, China, and South Africa) from 1986 to 2021. To address cross-sectional dependence and ensure robustness, we employed the augmented mean group (AMG) and cross-sectional autoregressive distributed lags (CS-ARDL) estimation techniques. Our findings show that innovation plays a key role in mitigating carbon risks, with a more pronounced effect on territorial carbon risk compared to consumption-based carbon risk. Furthermore, financial development exerts a positive influence on carbon risk, especially in the context of consumption-based emissions. Notably, institutional quality mitigates both forms of carbon risk. These outcomes suggest that BRICS countries should consider the types of carbon risk when formulating carbon emissions mitigation strategies.

Keywords

• Innovation
• cross-sectional dependence
• territorial carbon risk
• consumption carbon risk
• institutional quality and financial development