The Role of Financial Development and Capital Formation in Promoting Renewable Energy in Bangladesh

Abstract

Bangladesh, endowed with abundant resources, is at a crucial juncture where the potential for sustainable renewable energy use can be significantly expanded. This study examines the influence of financial development, foreign direct investment (FDI), economic growth, carbon dioxide emissions, and capital formation on renewable energy consumption in Bangladesh, using time series data from 1991 to 2020 and the ARDL bounds testing approach to cointegration. The findings show a long-term positive correlation between financial development and capital formation with renewable energy consumption, while FDI and economic growth have no significant long-term impact. Carbon dioxide emissions, however, negatively affect renewable energy consumption in both the short and long term. In the short term, capital formation and FDI also negatively impact renewable energy use, whereas financial development has a positive and significant effect. These results highlight the importance of understanding how financial development and capital formation can promote renewable energy, not only in Bangladesh but also in other developing and developed countries. To mitigate environmental harm and boost renewable energy use, it is essential to eliminate fossil fuel subsidies and implement a carbon tax on non-renewable energy. Additionally, Bangladeshi policymakers should promote green financing and increase investment in clean renewable energy projects to build a strong renewable energy economy.

Keywords: Financial development, Environmental degradation, Renewable energy, ARDL, Bangladesh.