Achieving clean energy transitions: How green innovation and financial development shape energy usage

Abstract

Clean energy usage plays a key role in reducing reliance on fossil fuels and mitigating global environmental degradation. This study aims to address environmental challenges by examining the impact of green innovation and financial development on total, clean, and dirty energy usage in 49 high-income countries from 1990 to 2023 by employing the Common Correlated Effects Estimator (CS-ARDL). The findings reveal that green innovation significantly reduces total and dirty energy usage while increasing clean energy usage, underscoring its critical role in promoting sustainable energy transitions. In contrast, financial development alone increases total energy usage, as well as both dirty and clean energy usage. However, the interaction between financial development and green innovation yields favorable outcomes, reducing total and dirty energy usage while enhancing clean energy usage. The interaction of GDP and population growth with financial development is found to increase total and dirty energy usage. Moreover, financial markets encourage clean energy usage, while financial institutions tend to reduce it. Furthermore, financial development, green innovation, population, and GDP exhibit bidirectional causal relationships with total, clean, and dirty energy usage. In addition, Quantile Regression Analysis confirms that green innovation effectively reduces total and dirty energy usage while boosting clean energy usage, especially at higher quantiles. Meanwhile, financial development also decreases total and dirty energy usage in higher quantiles and promotes clean energy usage in the middle quantile. These findings highlight the importance of coordinated policies that combine green innovation with financial development to achieve sustainable energy systems and address global environmental challenges.