Towards renewable energy generation and low greenhouse gas emission in high-income countries: Performance of financial development and governance

Abstract

The reduction of carbon footprint and facilitation of renewable energy remains on the frontline of global environmental issues. This study examines the impact of financial development and governance on renewable energy generation and greenhouse gas (GHG) emissions. The study covers 35 high-income countries (HICs) from 1996 to 2020. The panel vector autoregressive (PVAR) test for causality establish the feedback hypothesis for financial development and GHG emissions; governance and renewable energy generation. Unidirectional causality was observed from financial development to renewable energy generation and from governance to GHG emissions. The PVAR model explored the connection of GHG emissions and renewable energy generation with financial development and governance. Using the impulse response functions (IRFs), we analyse the response of renewable energy generation and GHG emissions to shocks in governance and financial development. The analysis was finalized by the variance decomposition of the study variables. In general, our empirical results reveal that both financial development and governance have a minor influence and can only slightly explain GHG emissions and renewable energy generation. These results indicate that while financial development and governance do impact GHG emissions and renewable energy generation in HICs, their impacts are still weak.