Financial development, institutional quality and renewable energy consumption. A panel data approach

Abstract

Global warming creates significant problems, and it is expected to cause changing climate patterns worldwide. Although climate change has posed new challenges to all economic actors, increasing the need, among others, for investments and stronger institutions, there is still little or inconclusive evidence in the literature on how these changes in financial systems will influence the level of renewable energy consumption. Using a sample composed of 27 EU member states over the 2000–2020 period, we examine the dynamics of the relationship between financial development, institutional quality, and renewable energy consumption. The methodological approach includes both quantitative techniques and qualitative sequential methodology, such as factor analysis, fixed-effects panel regression analysis, and empiric analysis. Our results reveal that increased financial development has a significantly positive impact on renewable energy consumption. Additionally, given that few studies focus on the quality of institutions and governance and their implication for investment procedures in the area of green projects and capital accumulation, we extend our analysis by examining the implication of institutional quality and we find that institutional quality positively influences energy consumption and consolidates its effectiveness in reducing carbon emissions.