The Role of Financial Development in Driving Renewable Energy Adoption in Emerging Economies

This paper asks whether financial development helps countries shift their energy mix toward renewables. We assemble an annual panel for 20 emerging market economies over 2003 to 2018 and estimate dynamic models that account for persistence and endogeneity using two-step Arellano–Bond Difference GMM. Financial development is measured first with a composite index and then by three channels: stock market turnover (liquidity), domestic credit to the private sector, and international private debt securities. The composite index is positively related to renewable energy consumption, with the effect concentrated in equity-market liquidity. By contrast, bank credit and international private debt show no robust relationship with the renewable share. GDP per capita is negatively related to the renewable share, consistent with rapid demand growth initially being met by incumbent fossil capacity in the absence of supportive policy. Taken together, the results point to market based finance particularly liquid equity markets as the more effective lever for scaling clean energy in emerging economies, highlighting the value of capital market development alongside power-sector reforms.