Evaluating the role of renewable energy and government consumption in reducing CO2 emissions: A dynamic panel data analysis

Abstract

Reducing CO₂ emissions poses a critical challenge for rapidly industrializing lower-middle-income countries (LMICs), where economic expansion pushes enhanced energy consumption, industrial activity, and transportation emissions. While previous research has separately examined the roles of renewable energy adoption and government spending in mitigating emissions, this study uniquely investigates their combined and interactive effects on CO₂ emissions in LMICs, providing novel empirical insights through dynamic analysis. This research employs panel data from 26 LMICs spanning 2002 to 2022, utilizing fixed-effects, random-effects, and generalized method of moments (GMM) approaches to address endogeneity, autocorrelation, and unobserved heterogeneity. The robust GMM estimators, handling these issues effectively, ensure reliable and complete causal inferences. The findings from the preferred GMM model indicate that a 1 % increase in renewable energy consumption results in a 0.025 % reduction in CO₂ emissions, but a 1 % rise in government expenditure contributes to a 0.0531 % decrease, when spending is environmentally aligned. However, the interaction term between renewable energy and government consumption demonstrates a small but significant positive effect, indicating that poorly targeted fiscal spending may dilute the environmental benefits of renewables. GDP growth and energy use dramatically rise emissions, supporting the Environmental Kuznets Curve (EKC) hypothesis, while urbanization and education show mixed effects. These results underscore the necessity of integrating renewable energy expansion with strategic government fiscal interventions to promote sustainable emission reductions. The study adds to the body of knowledge on sustainable development literature by elucidating the complex interplay between fiscal policy and renewable energy adoption. We recommend that policymakers in LMICs prioritize green-aligned spending and phase out fossil incentives to maximize synergies, fostering scalable models for global climate goals.