European institutional quality and carbon emissions: Convergence club analysis

Abstract

If the quality of institutions in the European Union (EU) converged, harmonized policies could achieve climate neutrality. This paper examines institutional convergence within the EU using log-t regression, allowing for the possibility of multiple equilibria. It also analyzes how overall institutional quality affects carbon dioxide (CO₂) emissions in three identified convergence clubs over thirty years. Driscoll-Kraay and Prais-Winsten standard errors estimators are used, accounting for economic growth, renewable energy, industrialization, urbanization, innovation, and exogenous shocks. The results show that institutional quality affects CO₂ emissions differently across clubs, emphasizing customized policy approaches. Addressing endogeneity, a two-stage least squares fixed effects estimator reveals that institutional quality has a negative, but statistically insignificant, effect on CO₂ emissions in both the highest and lowest institutional quality clubs, while significantly increasing emissions in the mid-tier club. Economic growth increases CO₂ emissions, whereas renewable energy consumption reduces them across all convergence clubs and methods. Other factors vary across clubs.