Achieving ecological sustainability in European Union: The role of fiscal decentralization and green innovation

Abstract

European Union member states are dedicated to bring standards and create climate change mitigation strategies at the center stage of public policy, prioritizing energy sector's transition from non-renewable to renewable sources by the means of innovation. Though there are a plethora of studies on determinants of environmental degradation, the nexus between fiscal decentralization and ecological intensity has been lacking of empirical evidence. To bridge this shortcoming, this study aspires to investigate the direct impact of fiscal decentralization, economic abundance, human capital, energy use and green innovation on environmental degradation and how green innovation moderates the impact of fiscal decentralization on environmental degradation. Using the theoretical setting of environmental Kuznets curve (EKC) phenomenon, this study analyzes the determinants of environmental degradation measured by ecological intensity and carbon intensity respectively across the nine European Union member states over the time span from 1995 to 2018. This study built upon a panel Method of Moments Quantile Regression (MMQR) with fixed effects and the ordinary least squares (OLS) regression with Driscoll-Kraay (DK) standard errors to validate the appropriateness of the EKC hypothesis in the observed sample authenticating the inverted U-shaped pattern between economic abundance and environmental degradation. Insofar as the direct impacts are considered, human capital and green innovation are efficient in abating environmental degradation of the countries under examination whereas energy use and fiscal decentralization aid in to environmental degradation. Regarding the indirect impacts, green innovation negatively moderates the association between fiscal decentralization and both indicators of environmental degradation namely, ecological intensity and carbon intensity. In the light of these findings, it is imperative for European Union member states to authorize the local governments to reduce pollution through innovation in climate change mitigation technologies to reinforce the Sustainable Development Goal (SDG) 12.