Circular economy and EU's energy transition: The moderating and transitioning effects of financial structure and circular carbon technology innovation: Evidence from C-Lasso and PSTR approaches

This study estimates the possible linkages from circular economy (CE) to energy transition (ET) using the moderation effects of circular carbon technology innovation (CCUS) and financial structure (Fins) for 27 EU member countries. This research adopted the data between 2000 and 2022 and applied novel econometric approaches, including the extended version of penalized least square (PLS) classifier lasso (C-Lasso) and Panel Smooth Transition Regression (PSTR) for empirical analysis. The advantage of C-Lasso is that it divides the panel data into multiple groups (Group 1: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czechia, Denmark, Estonia, Finland, and France; Group 2: Germany, Greece, Hungary, Ireland, Italy, Latvia, and Lithuania; and Group 3: Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden) and estimates each group independently. The results obtained from the study show that CE is effective in improving energy transition in the selected countries, with the strongest impact seen in Group 3 (0.379 %), followed by Group 1 (0.358 %), and then Group 2 (0.107 %). The results further validated that CCUS moderated the relationship between CE and ET in Group 2 and had no significant response in Group 1. In contrast, financial structure negatively impacts the CE-energy transition relationship across all groups. Regarding regional heterogeneity, the results show that Fins and CCUS do not significantly support the CE-ET connections in EU, Eastern, Northern, and Southern Europe; however, the Fins develop some relationships in Western Europe. Finally, these results are discussed to devise policies for sustainable energy transition across the EU.