Does improving economic efficiency reduce ecological footprint? The role of financial development, renewable energy, and industrialization

Abstract

With the ongoing expansion of global economic activities, environmental degradation has emerged as a progressively severe challenge. The Sustainable Development Goals are significantly impacted by this issue, making it essential to establish a symbiotic relationship between economic development and environmental protection. In this context, an investigation into the efforts of the OECD to promote ecological protection assumes a critical role, given its prominent position as a leading economic cooperation organization. Therefore, we examine the relationship between economic efficiency, financial development, renewable energy, industrialization, and ecological footprint in 36 OECD countries from 1995 to 2018. An empirical analysis employing the fully modified Ordinary Least Square technique reveals an inverted U-shaped curve relationship between economic efficiency and ecological footprint, supporting the environmental Kuznets curve (EKC) hypothesis in OECD countries. Moreover, the research reveals that financial development and industrialization exacerbate environmental damage, while the advancement of renewable energy plays a pivotal role in controlling the ecological footprint and fostering environmental conservation. Furthermore, by introducing interaction terms, we find that financial development and renewable energy weaken the positive effect of economic efficiency on the ecological footprint, while industrialization reinforces it. Finally, the findings of the Dumitrescu-Hurlin panel causality analysis show that the causal relationship between all three variables, namely economic efficiency, financial development and renewable energy consumption, and ecological footprint is bidirectional. In contrast, the causal relationship between the degree of industrialization and ecological footprint is unidirectional. These empirical findings provide practical policy recommendations for fostering sustainable development in OECD countries and offers valuable insights and lessons that can inform the formulation of relevant policies in other countries and regions. Overall, this study not only innovatively enriches the theoretical content of the EKC hypothesis from the perspective of the relationship between economic efficiency and ecological footprint, but also has important practical guidance significance.