Does financial inclusion impact CO2 emissions? Evidence from Asia

•Examine the impact of financial inclusion on CO2 emissions in Asia from 2004 to 2014.•Three proxies of financial inclusion are built based on principal component analysis.•Estimate the model by Hoechle (2007) procedure for Driscoll-Kraay standard errors.•Financial inclusion appears to have led to higher emissions of CO2 in the region.•No policy synergies were found between financial inclusion and mitigating emissions. This study examines the impact of financial inclusion on CO2 emissions using a sample of 31 Asian countries during the period 2004–2014. Three composite indicators for financial inclusion are constructed using principal component analysis (PCA) based on normalized variables. To estimate the model, we adopted the Hoechle (2007) procedure which produces Driscoll-Kraay standard errors for linear panel models that are not only heteroskedasticity consistent but also robust to general forms of cross-sectional dependence. We find that income, energy consumption, industrialization, urbanization, FDI and financial inclusion appear to have led to higher emissions of CO2 in the region. Meanwhile, increased openness to trade seems to have reduced CO2 emissions. The findings are qualitatively robust to different proxies of financial inclusions and reasonable modifications to specification of the model. The empirical results imply that there are currently no policy synergies between growing financial inclusion and mitigating CO2 emissions. Thus, financial inclusion should be integrated into climate change adaptation strategies at local, national and regional levels, especially to address the side effect of higher CO2 emissions associated with improved financial inclusion.