Financial development and renewable energy adoption in EU and ASEAN countries

Abstract

The shift from carbon-based to green energy is pivotal in addressing climate change. However, this transition is expensive, and the availability of financing sources is a necessary precondition for the green transformation of the economy. We therefore examine the role of financial institutions and capital markets in facilitating this change, focusing on a heterogeneous sample of 32 EU and ASEAN countries covering the years 2000 to 2020. Our findings reveal a persistent preference by financial institutions and banks for carbon-intensive energy production, negatively impacting renewable energy consumption. Contrarily, developed capital markets demonstrate a positive influence on green energy initiatives, especially pronounced in EU countries. The results highlight a dichotomy in financial support for green energy transition. While traditional financial institutions lag in supporting renewable energy, developed capital markets show a positive effect for green energy production. Concluding, we advocate for an increasing financialization of renewable energy markets and enhanced regulatory support for banks and financial institutions in supporting renewable energy business models.