The interaction of finance and innovation for low carbon economy: Evidence from Saudi Arabia

Abstract

Saudi Arabia sets an ambitious plan to install 58.7 GW renewable capacity along with several mitigation measures. For the smooth accomplishment of undertaken projects, the role of the financial market is crucial. This paper investigates the role of financial development in explaining the low carbon economy (LCE), incorporating the role of innovation in the context of Saudi Arabia, where fossil fuel contributes almost 100% share of the total energy mix. We apply the standard, asymmetric, and quantile Autoregressive Distributed Lag (ARDL) Approaches to analyse our time-series data from 1981 to 2016 (both yearly and monthly forms). Our empirical analysis demonstrates that finance asymmetrically fosters the carbon economy, but it helps to achieve a low carbon economy through the channel of innovation under different economic circumstances. Our empirical evidence reinforces the role of the financial market in overcoming the financial constraints for launching green projects.

Keywords

• Low carbon economy
• Financial development
• Quantile ARDL
• Saudi Arabia