The nonlinear effects of environmental innovation on energy sector-based carbon dioxide emissions in OECD countries

Abstract

This paper empirically investigates the impact of environmental innovation on energy sector-based CO2 emissions using a large dataset for 32 OECD countries covering the period 1997–2018. To detect the nonlinear relationship between variables, this paper adopts a panel smooth transition regression (PSTR) model, which can estimate both the threshold level endogenously and the smoothness of the transition from one regime to another. The findings indicate that environmental innovation has a reducing effect on CO2 emissions from the energy sector up to a certain level of innovation is insignificant (1st regime), then it has a reducing effect (2nd regime), and above this level environmental innovation has an increasing effect on carbon emissions (3rd regime), suggesting the existence of a rebound effect. These findings point out that environmental innovations alone are not a solution to struggle environmental problems and should be supported by environmental policies to reveal their environmental reflections. This paper not only makes an important contribution to the empirical literature, but also reveals important policy implications, particularly to achieve climate change targets.