The effects of financial institutions on the green energy transition: A cross-sectional panel study

Abstract

A growing body of literature has focused on exploring the potential determinants of the green energy transition. This study focuses on financial institutions’ roles and efforts. This study is probably the first study to be conducted on a sample of 214 countries/regions worldwide between 1960 and 2017. We use four proxies to measure the performance of the four aspects of financial institutions: financial depth, access, efficiency, and stability. Apart from the global sample, we conduct panel data analysis on a subsample of countries/regions at different income levels. A panel-corrected standard error technique was adopted to obtain robust standard errors. Empirical evidence supports a strong causal relationship between financial institutions and green energy for the global sample. Depth and access to the development of financial institutions have a substantial impact on the green energy transition. However, there are considerable differences in the estimates for the different subsamples. The positive effect of high-income countries/regions is significantly higher than the global average. This demonstrates that high-income countries/regions with well-developed financial systems can provide a particular mix of financial instruments for green energy investment and innovation. However, the stability of financial institutions seems to hinder the further development of green energy deployment. Moreover, in low-and lower-middle-income countries/regions, the development of financial institutions hinders green energy transition, and inadequate financing conditions remain a major challenge. Finally, the policy implications of these findings are provided.