Nonlinear and distributional effects of financial development on carbon emissions in Nigeria and the United Kingdom

Abstract This study investigates the nonlinear and distributional effects of financial development on carbon emissions in Nigeria and the United Kingdom over the period 1990–2024. Using a balanced panel of 70 observations, the analysis integrates interaction-augmented Environmental Kuznets Curve modelling, panel ARDL and nonlinear ARDL frameworks, quantile regression, financial threshold estimation, time-varying spillover analysis, causality beyond the mean, machine-learning robustness checks, and policy simulations. The results confirm an inverted-U income–emissions relationship, with EKC behaviour emerging more strongly in higher-emission regimes. Financial development initially increases carbon emissions but becomes environmentally beneficial after surpassing a critical threshold and when complemented by renewable energy expansion and strong institutional quality. Asymmetric and quantile results reveal that positive and negative financial and energy shocks exert uneven effects across emission distributions, while time-varying spillovers highlight heightened interconnectedness during periods of economic stress. Machine-learning evidence corroborates the nonlinear importance of energy use, income, renewable energy, and governance, while policy simulations show that isolated financial expansion raises emissions but coordinated green finance and renewable energy policies achieve substantial mitigation gains. Overall, the study advances the climate–finance literature by demonstrating that finance becomes green only under structural and institutional conditions.