The moderating role of financial institution development in the technological innovation and carbon emissions relationship: An effect size perspective.

While prior research has advanced our understanding of the relationship between technological innovation and carbon emissions, the conditions under which this relationship is pronounced remain underexplored. This study addresses this gap by examining how financial institution development moderates the effect of technological innovation on carbon emissions in sub-Saharan Africa. Using national-level panel data including aggregated patent applications as a proxy for innovation and national CO2 emissions from 47 countries spanning 2000-2024, we apply Fixed Effects (FE), Instrumental Variables with Fixed Effects (FE-IV), and two-step System Generalised Method of Moments (GMM) estimations to ensure robust results. Our findings reveal that while technological innovation reduces carbon emissions, this emissions-reducing effect is reversed when financial institution development is at high level, a counterintuitive result suggesting that financial systems may channel resources toward carbon-intensive activities in the absence of environmental safeguards. Effect size estimations further indicate that the conditional impact of innovation on emissions is strongest in countries with more developed financial systems and weakest where financial systems are less developed. By quantifying these conditional effects, the analysis offers policymakers clearer insights into how the environmental benefits of innovation vary by financial system maturity highlighting where regulatory interventions are most needed. Theoretically, our findings underscore the institutionally contingent nature of technological innovation's environmental outcomes. From a policy standpoint, they call for integrating sustainability criteria into financial regulation and innovation financing to ensure financial sector development aligns with long-term climate goals.