Our analysis delves into the relationships between green finance, technological innovations, economic complexity, urbanization, energy consumption and ecological footprint and want to fa
INTRODUCTION
Research rationale
Our world is at a critical juncture, facing significant environmental challenges alongside hopeful prospects Human activities have left deep scars, with climate change leading to rising temperatures and extreme weather events such as heat waves and floods Ecosystems are increasingly unbalanced due to pollution choking oceans and deforestation ravaging forests This alarming shift is driven by the rapid pace of commercial expansion, which depletes natural resources and releases harmful greenhouse gases (GHGs) into the atmosphere.
The current state of our planet's ecology presents a dual narrative: one of environmental degradation due to human excess and another filled with hope and innovation The future of our planet is precariously balanced, with today's choices shaping which narrative will dominate The urgent need for transformative action has led to a global emphasis on sustainable development goals, which aim to tackle the intertwined issues of ecological decline, social inequality, and economic growth By promoting these goals, governments and organizations worldwide seek to align economic activities with environmental stewardship, fostering a balance between prosperity and ecological health Research, such as that by Ntanos (2018), highlights the positive correlation between renewable energy consumption and economic growth in European countries, emphasizing the importance of sustainable energy sources The formulation of sustainable development goals requires in-depth research and strategic planning to address environmental, social, and economic challenges In this context, green finance has emerged as a crucial concept, encompassing investments in sustainable projects and policies that support the transition to a more sustainable economy.
Green finance is a transformative force that positively impacts both the environment and the economy by reducing carbon dioxide (CO2) and overall greenhouse gas (GHG) emissions A study by Yuyu Zhan (2023) analyzing the effects of green finance and financial innovation on China's environmental status from 1996 to 2020 reveals that increases in green finance and financial innovation lead to significant reductions in CO2 and GHG emissions Specifically, a 1% rise in green finance correlates with a 0.492% decrease in CO2 emissions and a 0.456% decrease in GHG emissions These findings underscore the substantial role of green finance in enhancing environmental quality and improving overall environmental performance.
Green finance also supports the development of green and energy-saving industries, forcing highly polluting industries to upgrade their technology and reduce pollution emissions
Green finance plays a crucial role in fostering sustainable economic development, reducing energy consumption, and mitigating environmental pollution Research indicates that green finance initiatives in South Asian countries have significantly lowered commercial CO2 emissions, aiding in environmental protection and green economic recovery A study by Atif Jahanger (2023) explores the asymmetric impacts of green finance and clean energy on carbon emissions, factoring in economic growth, foreign direct investment, and urbanization Utilizing the non-linear autoregressive distributed lag (NARDL) model for data from 2000 to 2020 in ASEAN nations, the findings reveal that positive developments in green finance and clean energy enhance ecological quality, while negative shocks adversely affect it The study also notes that economic growth and urbanization can lead to increased pollution Consequently, it is recommended that governments and policymakers in ASEAN countries implement strong financial mechanisms and develop long-term green investment strategies to attract green finance and promote sustainable environmental practices.
Green finance is a crucial approach that integrates financial considerations with ecological security, promoting a growth model that aligns economic development with effective environmental protection It transcends traditional financial practices by employing innovative mechanisms for the sustainable use of natural resources, fostering restorative practices The success of green finance in creating a sustainable environment relies on its capacity to balance economic goals with environmental stewardship.
In Europe, the European Green Deal stipulates that the EU will become climate-neutral by
To achieve the goals of the European Green Deal, the European Commission aims to mobilize at least €1 trillion in sustainable investments over the next decade, with green investments representing 30% of the EU's budget from 2021 to 2028 and the Next Generation EU recovery fund Member states must allocate a minimum of 37% of the €672.5 billion Recovery and Resilience Facility to climate-aligned investments and reforms, ensuring that financing does not compromise environmental objectives The Commission plans to generate 30% of NGEU funds through green bonds, while the EU Taxonomy for Sustainable Activities provides clear criteria for identifying genuine green investments Asset managers are increasingly creating green investment funds to meet the rising demand from investors who seek both financial returns and positive environmental impacts Despite challenges such as ensuring transparency and avoiding greenwashing, Europe's commitment to green finance is evident and gaining momentum.
"Finance can be a powerful driver of change, and green finance can play a crucial role in achieving the objectives of the European Green Deal" (finance.ee.europa.eu).
Green finance holds significant global importance, yet research on its comprehensive impact on environmental and economic development is limited Our study aims to bridge this knowledge gap by exploring the complexities of green finance, particularly its role in reducing the ecological footprint within the European Union The EU's commitment to aligning financial systems with sustainable practices makes it an ideal focal point for our investigation By concentrating on this region, we can identify commonalities and differences in the application of green finance across various countries, offering valuable insights into the interplay between economic growth and environmental sustainability.
This article aims to enhance the understanding of green finance's impact within the European Union, highlighting differences among member states By analyzing how effective green finance is in minimizing ecological footprints, we seek to provide a detailed perspective on the complex dynamics involved, taking into account the distinct socio-economic and environmental contexts of each country.
Our research aims to advance the existing green finance literature by exploring its influence on ecological footprints and identifying ways to leverage green finance for achieving environmental and economic goals within the European Union This comprehensive analysis is essential for policymakers, financial institutions, and environmental advocates, providing critical insights into customized strategies that promote sustainable development on both regional and global scales.
Research objective and research questions
Our research aims to explore how various factors contribute to reducing ecological footprints in European Union countries We focus on understanding the complex relationships between these key elements and their combined influence on promoting sustainability and environmental responsibility across the EU.
Economic complexity plays a crucial role in understanding the relationship between an economy's diversification and sophistication and its environmental impact It raises important questions about whether specialization in specific sectors increases resource demands or if a diversified economy can drive innovation and enhance efficiency, ultimately influencing its environmental footprint.
Green finance serves as a promising solution in the financial sector, aiming to direct investments into environmentally sustainable initiatives However, its actual impact on reducing the ecological footprint is still under scrutiny This research seeks to evaluate the effectiveness of green finance in fulfilling its commitments, highlighting both its potential benefits and inherent limitations.
Technological innovation has the potential to significantly impact environmental issues, either worsening or improving them This article explores the ability of various technological advancements in different sectors to minimize ecological footprints, while also recognizing the challenges and unintended consequences that may occur.
Energy consumption is essential for modern economies but comes with significant environmental costs This article examines the complex relationship between various energy sources and their ecological impact Identifying cleaner energy alternatives and assessing their potential to reduce environmental harm is vital for a sustainable future.
Urbanization significantly alters the human environment, prompting worries over resource depletion and pollution This article explores the complex dynamics of urban growth, aiming to understand its impact on the ecological footprint while identifying strategies for sustainable urban development.
Based on this objectives, we have research questions following to:
1 What are the effects of economic complexity on the ecological footprint?
2 What are the effects of green finance on the ecological footprint?
3 What are the effects of urbanization on the ecological footprint?
4 What are the effects of energy consumption on the ecological footprint?
5 What are the effects of technological innovations on the ecological footprint?
Research subject and scope
This study investigates the relationships among ecological footprint (ECFP), economic complexity index (ECI), green finance (GF), technological innovation (TI), energy consumption (EC), and urbanization (UP) using panel data from 27 European countries from 2017 to 2021 It highlights the significant impacts of ECI, TI, GF, EC, and UP on ECFP, while also exploring the interconnectedness of ecological footprint, economic complexity, and green finance in relation to technological advancements.
Our analysis of energy consumption in these countries highlights the urgent need for government intervention to address climate change and protect the environment We recommend enhanced investments in green finance, strategies for economic diversification, and the adoption of advanced technologies to achieve these goals.
Research methodology
This study analyzes panel data from 27 European Union member states, utilizing the two-step SysGMM regression method To ensure the model's reliability, relevant tests are conducted, allowing for a comprehensive exploration of the relationships among the variables in the model.
Research structure
This chapter outlines the background of the topic and the rationale behind selecting it for research It presents the research objectives, subjects, and scope, while also offering an overview of the research methodology and structure.
This chapter explores the theoretical foundations of the ecological footprint and its complex interactions with national complexity, technological advancements, and green finance It also provides a summary of current empirical research that illuminates the dynamics of these relationships.
In this chapter, we show the source of data collection, variables description and research models and research methodology that used to lest Here is our steps:
Step 1: Conducting econometrics method to analyze panel data
Chapter 4: Research result and discussion
This section builds on the methodological foundations established earlier, presenting findings from the applied methods Our main focus is to explore the complex relationship between ecological footprints and the chosen variables outlined in the hypotheses By thoroughly analyzing the results, we aim to provide valuable insights that clarify the dynamics affecting ecological footprints.
Chapter 5: Research conclusion and recommendation
This chapter provides a thorough examination of research issues, draws conclusions from the empirical findings of the research model, highlights the study's inherent limitations, and suggests potential directions for future research expansion.
LITERATURE REVIEW
Theoretical background
The ecological footprint is a comprehensive metric that measures the environmental degradation caused by human activities, as highlighted by Ulucak and Lin (2017) It assesses the cumulative impact of human actions through factors such as land use efficiency, water consumption in production, and waste generation This metric provides a holistic view of the environmental consequences linked to the production of goods and services essential for maintaining an average standard of living, as noted by Rashid et al (2018).
The ecological footprint goes beyond simple numbers, serving as a powerful visual representation of the environmental impact of our lifestyle choices It graphically illustrates the ecological pressures created by the production processes needed to sustain our standard of living This visual tool is essential for raising awareness and promoting a deeper understanding of the delicate balance necessary for achieving sustainability.
The overexploitation of natural fuels and resources exacerbates climate change and creates a positive feedback loop that diminishes Earth's biocapacity and efficiency This unsustainable practice leads to an increased ecological footprint for products derived from these depleted resources Carbon emissions, a significant factor in this ecological footprint, are crucial in driving global warming, climate-related disasters, and the degradation of our natural resources.
Ensuring the sustainability of land, forests, aquatic ecosystems, and human habitats is crucial Sustainability serves as the key solution to address these challenges An integrated approach that combines climate resilience through adaptation and mitigation strategies, along with nature-based solutions and the United Nations Sustainable Development Goals, can significantly reduce ecological footprints in a changing climate.
In conclusion, the ecological footprint serves as a vital indicator for understanding the environmental impact of human activities, highlighting the interconnectedness of lifestyles and ecological health By adopting a holistic perspective, it emphasizes the importance of sustainable practices and responsible resource management for achieving harmony between humanity and the planet.
2.1.2 Relationship between economic complexity and environment
Countries with high economic complexity are key players in global trade, significantly involved in exporting goods worldwide Their economic strength often elevates them to leadership roles internationally However, this robust economic activity can have environmental consequences, as these nations typically have increased energy demands, leading to higher greenhouse gas emissions and contributing to environmental degradation.
Economically complex nations hold the potential for environmental sustainability, largely dependent on their adoption of clean energy in mass production By prioritizing clean energy sources in manufacturing, these countries can pave the way for a more sustainable future, demonstrating that economic prosperity and responsible environmental practices can coexist This approach helps to mitigate the negative impacts typically linked to economic complexity.
The economic complexity index is a crucial tool for predicting differences in environmental and economic development at both national and global levels By analyzing this index, policymakers, researchers, and stakeholders can understand the potential environmental impacts of economic activities, enabling them to make informed decisions that align economic growth with sustainability Recognizing the complex interplay between economic complexity, energy consumption, and environmental effects is essential for developing policies and strategies that foster a balance between economic progress and ecological health.
2.1.3 Relationship between green finance and environment
Green finance is essential for promoting sustainability and achieving a low-carbon economy Defined by the European Banking Federation, it encompasses environmental and climate change-related factors, such as pollution, greenhouse gas emissions, energy efficiency, and renewable energy The OECD highlights that green finance aims to foster economic growth while simultaneously reducing pollution and minimizing waste Understanding the theoretical foundations of green finance reveals its transformative potential in encouraging environmentally responsible practices, making it crucial to explore its nuanced aspects and multifaceted impacts.
Green finance is essential for transforming economic systems by channeling investments into projects that enhance environmental sustainability The interplay between financial strategies and ecological objectives highlights the importance of effectively designed green finance initiatives When carefully implemented, these initiatives can reduce environmental harm and contribute to building a resilient and sustainable ecosystem.
2.1.4 Relationship between technological innovations and environment
Innovations in renewable energy, smart grids, precision agriculture, and low-carbon transportation are crucial for countries aiming to reduce their environmental impact The increasing efficiency and affordability of solar panels enable the generation of clean electricity without fossil fuels A prime example is Morocco's Noor Ouarzazate solar complex, the largest in the world, which powers over a million homes and cuts CO2 emissions by 2.5 million tons annually Additionally, smart grids enhance energy distribution, minimizing waste and boosting reliability In China, these intelligent networks have saved over 100 billion kilowatt-hours of electricity, equivalent to removing 20 million cars from the roads.
By actively embracing technological advancements, countries can significantly reduce their ecological footprint, leading to meaningful and lasting environmental improvements These initiatives not only support the essential goal of environmental stewardship but also guide nations toward long-term sustainability, highlighting the strategic importance of integrating technology in the quest for a greener future.
2.1.5 Relationship between energy consumption and environment
Understanding the link between energy consumption and the environment involves exploring various theoretical frameworks, notably the Laws of Thermodynamics, which state that energy can only be transformed, not created or destroyed This principle highlights that energy usage ultimately dissipates into the environment, leading to thermal pollution and climate change Additionally, the Ecological Footprint framework assesses the human demand on nature for resources and waste absorption, allowing us to evaluate the effects of energy consumption on resource depletion, biodiversity loss, and ecosystem degradation.
The Environmental Kuznets Curve (EKC) hypothesis proposes a fascinating, yet controversial, relationship between economic development and environmental quality.
Imagine an inverted U-curve: as a nation's income per capita rises, environmental pollution initially worsens, but eventually starts to improve beyond a certain income threshold This
The concept of the "turning point" highlights the contrasting approaches of developing and wealthier nations regarding economic growth and environmental protection Developing economies often prioritize rapid growth, resulting in heightened pollution and energy consumption In contrast, as countries become wealthier, they tend to invest more in cleaner technologies and environmental safeguards, which can lead to a reduction in their ecological footprint, including lower air pollution and greenhouse gas emissions This trend is encapsulated in the Environmental Kuznets Curve (EKC), which illustrates that with increased income, nations may shift their focus from maximizing output to sustainable practices, ultimately reversing the initial environmental degradation.
2.1.6 Relationship between urbanization and environment
The relationship between urbanization and the environment is intricate, with urban metabolism serving as a key framework that likens cities to living organisms This perspective emphasizes that urban areas consume resources, produce waste, and interact with their environment, illustrating how urbanization amplifies resource extraction, escalates waste generation, and disrupts natural cycles.
Empirical relevant studies
2.2.1 Empirical studies that relevant to relationship between economic complexity and environment
The Economic Complexity Index (ECI) gauges the diversity and sophistication of an economy, highlighting its ability to produce and export a wide range of products and services As a crucial indicator of structural changes and innovation capacity, ECI also plays a significant role in determining environmental quality Nonetheless, the interplay between economic activities and environmental impact is intricate and continues to be the subject of extensive research and discussion.
Olimpia Neagu (2020) investigated the impact of economic complexity on ecological footprint (ECFP) by analyzing data from 48 complex economies between 1995 and 2014, utilizing advanced econometric techniques such as second-generation unit root tests, cointegration tests, Fully Modified Ordinary Least Squares (FMOLS), and Dynamic Ordinary Least Squares (DOLS) models The study found that increased economic complexity is associated with a larger ecological footprint in the long term, particularly in production-based activities, which intensifies environmental pressures This underscores the critical issue of environmental sustainability, especially as 75% of the countries studied are experiencing an ecological deficit.
Umer Shahzad et al (2023) investigate the impact of economic complexity on environmental performance in the United States by analyzing the relationship between Economic Complexity Index (ECI) and Environmental Carbon Footprint (ECFP) Utilizing extensive data from 1965Q1 to 2017Q4, the study employs advanced methodologies, including a newly developed quantile unit root test and quantile Granger causality tests The findings reveal that ECI significantly contributes to the ecological footprint, highlighting that factors such as product complexity, knowledge, skills, and structural changes are key drivers of resource utilization, thereby influencing ECFP.
Eirini Boleti et al (2021) provide a contrasting view by analyzing the relationship between economic complexity index (ECI) and environmental quality across 88 countries from 2002 to 2012 Their findings indicate that nations with higher ECI experience lower environmental degradation, suggesting that increased economic complexity correlates with improved environmental performance This implies that the sophistication of a country's exports does not harm the environment The study highlights that economic complexity reflects structural changes in the economy and signifies the integration of knowledge and innovation in production processes Countries with greater complexity foster technological advancements that positively impact the environment, leading to the development of eco-friendly innovations that replace outdated, harmful technologies, thereby enhancing the cleanliness and energy efficiency of production processes.
A study by Zahoor Ahmed et al (2021) examined the relationship between economic complexity and ecological footprints in G7 nations from 1985 to 2017, revealing that a higher Economic Complexity Index (ECI) is associated with a reduced Ecological Footprint (ECFP) The authors recommend that G7 countries prioritize the production of more sophisticated and complex goods to enhance sustainability.
The relationship between economic complexity and environmental impact remains contentious, with some studies suggesting that increased complexity leads to a larger ecological footprint and environmental degradation Conversely, others posit that the intricacies of a complex economy foster innovation and the creation of cleaner technologies that enhance environmental performance This ongoing debate underscores the necessity for further research, prompting our study aimed at providing valuable insights for sustainable development initiatives We propose the hypothesis H1, asserting that the level of economic complexity in each country positively influences its ecological footprint.
2.2.2 Empirical studies that relevant to relationship between green finance and environment
Environmental sustainability and green finance have become pivotal topics in recent discussions, drawing increased attention from both the academic community and policymakers The growing focus on the interplay between these concepts highlights their importance in addressing contemporary environmental challenges.
Amid increasing concerns about climate change, green finance has emerged as a promising solution, although empirical evidence regarding its environmental impact is limited To address this gap, Umar Numan et al (2023) conducted an analysis of green finance's role in 13 complex economies from 2006 to 2020, employing econometric methods such as Driscoll-Kraay standard errors and robustness tests Their findings indicate that green finance can significantly reduce the ecological footprint and contribute to environmental sustainability Consequently, the authors recommend that governments prioritize investments in green finance projects to lower carbon emissions and enhance environmental protection.
Ting Zhang and Fanzhen Zhao (2024) highlight the vital role of green finance in balancing economic growth and environmental pollution By analyzing Chinese data from 2001 to 2017, they explored the interconnections between green finance, environmental pollution, and economic development using a spatial simultaneous equation approach Their findings indicate that green finance not only fosters economic growth but is also bolstered by it, as increased economic development leads to greater investments in green finance Furthermore, the rising emissions contributing to environmental pollution necessitate enhanced investment in green finance, which can effectively manage and reduce these polluting emissions.
Gongliang Wu et al (2023) investigated the influence of green finance on carbon emissions efficiency using data from Chinese cities spanning 2006 to 2022, revealing that green finance significantly improves carbon emissions efficiency Notably, support for green initiatives emerged as the most effective sub-dimension of green finance These results contribute valuable theoretical insights into the role of green finance in enhancing carbon efficiency and serve as a foundation for developing strong policy frameworks that promote environmental sustainability.
A study by Weiwei Fu et al (2022) examined the long-term impact of green finance on environmental sustainability in ASEAN economies from 2012 to 2019, utilizing techniques such as fully modified least squares (FMOLS) and ADF and Phillip-Peron unit root tests Their findings, derived from the Vector Error Correction Model (VECM), revealed a negative correlation between green finance and CO2 emissions, alongside a positive influence on environmental sustainability in the region Consequently, the authors recommend that policymakers implement strategies focused on green finance within the financial sector to promote sustainable development in the long run.
Cai Li et al (2022) investigated the potential for emerging MINT economies—Mexico, Indonesia, Turkey, and Nigeria—to reduce environmental pollution effectively Utilizing panel data from 1990 to 2020 and employing the advanced CS-ARDL econometric method, the study explored the relationship between green finance and environmental outcomes in these nations The results suggest that green finance has the capacity to mitigate environmental pollution in both the short and long term.
A recent study by Arshian Sharif et al (2024) explored the impact of green finance on the environment in Malaysia from 1990 to 2018 The findings indicate that green finance plays a crucial role in addressing environmental challenges, promoting the use of renewable energy, supporting green investments, and fostering sustainable development.
Recent studies increasingly highlight the positive impact of green finance on environmental sustainability, indicating its potential to mitigate environmental degradation and support sustainable development However, as a relatively new field, the full extent of green finance's capabilities remains uncertain This study not only explores the connection between green finance and environmental outcomes but also investigates how national governments can encourage businesses to adopt green finance practices, particularly in light of the hypothesis that green finance may negatively affect the ecological footprint.
2.2.3 Empirical studies that relevant to relationship between technological innovations and environment
In their comprehensive analysis covering 1985 to 2018, Jun Wen et al (2023) examined how technological innovation can reduce environmental degradation in China, using the ecological footprint as a key metric The study incorporated variables such as technological innovation (TIN), economic growth (EG), trade openness (TO), and population (POP) Utilizing ARDL cointegration and validation techniques like CCR, DOLS, FMOLS, and Granger causality, the findings indicated a negative correlation between technological advancement and China's ecological footprint, highlighting beneficial environmental effects in both the short and long term The authors recommend prioritizing eco-friendly technologies, supported by carbon emission taxes and sustainable innovation initiatives, to foster long-term economic growth while minimizing environmental impacts.
RESEARCH METHODOLOGY
Data collection
This study investigates the impact of green finance on the environment across twenty-seven European Union countries, utilizing panel data from 2017 to 2021 The selected five-year period reflects the most recent developments within the EU, ensuring the relevance and accuracy of the findings As policies and societal behaviors evolve, analyzing contemporary data allows for a more precise understanding of the relationship between green finance and environmental outcomes Despite challenges in data collection, including the unavailability of complete data for 2022, this research contributes novel insights to the discourse on green finance A comprehensive list of the European Union countries is provided in Table 1.
Table 1: Member countries of the European Union.
Research models and variables description
Drawing inspiration from Umar Numan et al (2021) on the effects of Green finance on ecological footprints, we developed a model to examine the influence of various independent variables These include Green finance (GF, measured in Euros), the economic complexity index (ECI), technological innovation (TI), energy consumption (EC), and urbanization (UP) on ecological footprints.
ECFPi,t = f ( GFi,t, ECIi,t, TIi,t, ECi,t, UPi,t)
The study analyzes data from 2017 to 2021 across 27 cross-sections, focusing on the ecological footprint (ECFP) as the dependent variable It examines the influence of green finance (GF) as a control variable, while independent variables include technological innovation (TI), economic complexity index (ECI), energy consumption (EC), and urban population (UP).
The ecological footprint, promoted by the Global Footprint Network, serves as a key indicator for assessing the natural resources necessary to support an economy or population It measures the land and water area needed to sustainably supply resources and manage waste generated by a population The ecological footprint (ECFP) is crucial for evaluating environmental degradation, as it directly reflects the impact of human activities on the environment A larger ecological footprint signifies increased demand for natural resources and heightened environmental stress, resulting in issues such as pollution, biodiversity loss, and climate change.
Green finance is analyzed through government expenditure on environmental protection, measured in Euros, highlighting each country's commitment to sustainability This spending encompasses direct investments in renewable energy, waste management, biodiversity conservation, and clean technology, reflecting the government's policy priorities and dedication to environmental issues Such financial commitments are essential components of green finance, demonstrating a proactive approach to sustainable development.
This study investigates the impact of the Economic Complexity Index (ECI) on environmental outcomes, focusing on the relationship between a country's export structure and its environmental health The ECI measures the diversity and sophistication of a nation's economy, reflecting its productive capabilities and the intricacy of the products it exports The hypothesis posits that economies with higher complexity may possess enhanced technological and innovative capacities, potentially leading to more efficient resource use and reduced environmental degradation However, the study also acknowledges that complex economies might face greater environmental pressures due to their diverse industrial activities Ultimately, this research aims to determine whether countries with more complex economies are better positioned to adopt green technologies and sustainable practices, or if their industrial diversity exacerbates environmental challenges.
This research investigates the impact of "Technological Innovation," measured by the number of patent applications filed by residents, on the environment This metric serves as a vital indicator of a country's dedication to developing new technologies, including eco-friendly innovations and sustainable solutions An increase in resident-filed patent applications signals a nation's commitment to research and development, particularly in areas aimed at reducing environmental degradation, such as renewable energy, waste management, and pollution control The study highlights how internal research and development-driven technological innovation can address environmental challenges and foster ecological sustainability.
We assess the impact of energy consumption on environmental sustainability using Total primary energy supply per capita, measured in Tonnes of oil equivalent This metric reflects the total energy consumed by individuals in a country, including coal, oil, natural gas, electricity, and renewables, serving as a key indicator of energy consumption patterns and efficiency The relationship between energy consumption and environmental issues, such as greenhouse gas emissions, air pollution, and resource degradation, is crucial for developing energy policies and strategies that support environmental conservation and sustainable development goals.
Urbanization, defined as the percentage of a population living in urban areas, plays a crucial role in environmental studies due to its impact on resource consumption, energy use, and waste generation Urban centers often concentrate economic activities, leading to heightened environmental stress characterized by increased pollution and greater demands on infrastructure This study examines the complex relationship between urbanization and environmental degradation, questioning whether higher urban population percentages result in intensified ecological challenges or if strategic urban planning can foster sustainable living through enhanced infrastructure, green spaces, and efficient public services Understanding this relationship is vital for creating effective strategies for sustainable development.
Variable Symbol Unit Source Expected
ECI Index The Atlas of
Green finance GF Government expenditure on environmental protection in Euro
EC Total primary energy supply per capita (Tones of oil equivalent)
Urbanization UP Urban population WDI-DB (+)
Research methodology
Previous empirical studies on the impact of Green Finance in Europe have overlooked the use of Generalized Method of Moments (GMM) regression as a primary analytical tool This research article aims to address this gap by employing a two-step system-GMM regression to explore the relationship between the relevant variables in the model.
The dynamic nature of the ecological footprint as an independent variable can lead to significant influences from past footprint levels on current ECFP results, creating serial correlation that threatens overall stability Traditional regression methods often struggle with this issue, but Generalized Method of Moments (GMM) techniques mitigate these concerns by utilizing instrumental variables that impact the dependent variable without affecting the error term, resulting in more reliable estimates However, conventional dynamic panel GMM approaches may encounter weak instruments and bias in the presence of serially correlated error terms Therefore, we employ the two-step system GMM estimator, which is particularly effective in our context, as it adeptly manages dynamic characteristics and addresses potential serial correlation in error terms, thereby enhancing the reliability of coefficient estimates and providing robust, unbiased insights.
Our study utilizes panel data from EU member countries over five years (2017-2021), employing the two-step SysGMM method This approach effectively addresses individual country-specific characteristics while analyzing overall trends, offering a more precise analysis than traditional regression methods that consider observations independently.
3.3.1 Generalized Method of Moments (GMM) Regression
The investigation began with a thorough review of existing studies to pinpoint gaps in current knowledge Subsequently, data was collected from a panel, employing quantitative research methods To address endogeneity concerns, the study utilized the Generalized Method of Moments (GMM) regression technique, specifically the two-step Sys-GMM approach, analyzing a sample of 27 European Union nations The regression analyses yielded valuable insights into the intricate relationships among the model's variables.
The Arellano-Bond (AR) test, introduced by Arellano & Bond in 1991, evaluates the autocorrelation of error variances in a Generalized Method of Moments (GMM) model using a first-order difference format This approach often reveals first-order autocorrelation in the difference series, leading to inconclusive test results To further examine the second-order autocorrelation of residuals, the AR(2) test is employed The null hypothesis of the Arellano-Bond test posits that there is no second-order autocorrelation present in the residuals, with a higher P-value indicating a lack of such autocorrelation.
The AR(2) test indicates a robust absence of second-order autocorrelation in the residuals Additionally, the Arellano-Bond test was utilized in this study to confirm that the regression outcomes from the two-step SGMM method are free from significant errors.
The Hansen test serves as a vital tool in econometrics, particularly within the framework of generalized method of moments (GMM) estimation It plays a crucial role in assessing the validity of instruments, which are essential for accurately isolating causal effects and preventing misleading conclusions from data analysis.
This research employs the Hansen test to evaluate the reliability of regression outcomes from the two-step Sys-GMM model The Hansen test serves as an over-identifying restrictions test, assessing the appropriateness of the instrumental variables used in the GMM model By scrutinizing these variables, the test enhances the validity and accuracy of the regression results.
RESULT AND DISCUSSION
Statistical Description
The data analysis results are summarized in the table below, highlighting the central tendency and dispersion for each variable in the study This table includes key statistics such as the number of observations, mean, standard deviation, minimum, and maximum values for the variables employed in the research model.
Table 3: Descriptive statistics table of variables
Variable Obs Mean Std Dev Min Max
Correlation matrix
Table 4: Correlation matrix of variables utilized in the research model
ECFP ECI GF TI EC UP
Table 4 presents the correlation coefficient matrix, highlighting the relationships among the model's variables It is evident that the ecological footprint, indicated by the variable ECFP, is influenced positively by most of the other variables in the model.
The urbanization factor, represented by the variable UP (urban population), plays a crucial role in highlighting the adverse effects of urban populations on environmental conservation This negative impact is primarily due to the escalating environmental degradation associated with urbanization, a conclusion that aligns with the research findings of Nathaniel et al (2020) and Usman and Makhdum (2021).
Technological innovation can positively influence the ecological footprint; however, it may also lead to increased environmental degradation This finding contrasts with the research by Numan et al (2023) but aligns with Chunling et al (2021), which indicates that a rise in patents in Europe correlates with an increase in the ecological footprint and subsequent environmental degradation.
The Economy Complexity Index (ECI) among European Union member states positively influences the ecological footprint, indicating that higher ECI levels correlate with increased environmental degradation This relationship is supported by findings from Numan et al (2023), which demonstrate that as ECI rises, so does the ecological footprint, highlighting the complex interplay between economic development and environmental impact.
The green finance (GF) variable, which reflects the budget set by EU governments for environmental protection, exhibits a positive correlation with the ecological footprint, although this relationship lacks statistical significance Additional relationships within the model are detailed in Table 3, and further exploration of these connections will be addressed later.
Arrelano - Bond (AR) test
Table 5: First-order and Second-order Arellano-Bond test First-order Arellano-Bond test, AR(1) Second-order Arellano-Bond test, AR(1)
H: The model has no first-order serial coiTelation.
H: The model has no second-order serial correlation. z -1.17 z 0.62
The results of the first-order and second-order Arellano-Bond tests for serial correlation, as shown in the table, indicate that all models have a Pr>z value greater than 5% for both AR(1) and AR(2) tests This outcome allows us to accept the null hypothesis (Ho), confirming the absence of first-order and second-order serial correlation in the models.
Hansen test
Table 6: Hansen test result H; Instrumental variables are strictly exogenous
The Hansen test results indicate that the instrumental variables used in the GMM estimations are exogenous, as the null hypothesis (Ho) is accepted This acceptance means the Hansen test statistic is within acceptable ranges, confirming a vital requirement for GMM estimation Consequently, this ensures that the two-step SysGMM regression estimates are consistent and unbiased, making the results from this regression completely reliable.
Two-step SysGMM regression results and discussion
Table 7: Two-step SysGMM regression results
Delving into the table above, we can uncover some intriguing results from the two-step SysGMM regression Therefore, some noteworthy findings of the model include:
The regression analysis indicates a significant negative correlation between green finance (GF) and ecological footprint (ECFP) at a 99% confidence level This relationship suggests that increased government spending on environmental protection within the European Union facilitates the implementation of effective environmental policies and projects that reduce pollution Furthermore, these financial resources can be allocated to innovative projects that enhance environmental protection This study underscores the critical role of green finance in mitigating environmental degradation in EU countries, aligning with the author's expectations and corroborating the findings of Numan et al (2023), thereby supporting the acceptance of research hypothesis H2.
The study reveals a significant positive relationship between technological innovation (TI) and ecological footprint (ECFP) at a 99% confidence level, contrary to initial expectations and previous findings by Numan et al (2023), but aligning with Chunling et al (2021) This indicates that an increase in patents within EU member states correlates with a rise in ecological footprint, suggesting heightened environmental degradation The phenomenon can be attributed to the greater consumption and resource demands of European countries compared to less developed nations Consequently, the surge in patents likely escalates overall population demand, resulting in increased resource consumption and environmental harm, leading to the rejection of research hypothesis H3.
The positive relationship between urban population (UP) and ecological footprint (ECFP) is confirmed with a 99% confidence level, indicating that increased urbanization leads to greater environmental degradation As urban populations rise, the pressure on the environment intensifies, resulting in higher greenhouse gas emissions and resource demands, which heightens the risk of ecological damage This urban expansion within the European Union notably contributes to the decline of forest areas and biodiversity, particularly in Eastern European member states These findings align with the author's expectations and corroborate previous research, supporting the acceptance of research hypothesis H5.
The regression analysis revealed two positive relationships between economic complexity (ECI) and national energy consumption (EC) with ecological footprint (ECFP), aligning with the authors' expectations and prior studies However, it is crucial to highlight that these relationships did not produce statistically significant results in the two-step SysGMM regression, resulting in insufficient evidence to thoroughly evaluate research hypotheses H1 and H4.
CONCLUSION AND RECOMMENDATION
Conclusion
Climate change and environmental pollution are global challenges that require collective responsibility As various sectors shift towards sustainable development, the importance of Green Finance has grown significantly The United Nations Environment Program (UNEP) defines green finance as the enhancement of financial flows—encompassing banking, microcredit, insurance, and investment—toward sustainable development priorities Additionally, it provides financial support for green growth by significantly reducing greenhouse gas emissions and environmental pollution Green finance serves as a vital channel for capital, directing resources towards the development of a green economy and fostering sustainable environmental practices.
This study aims to explore the impact of green finance on environmental sustainability by analyzing key indicators such as government expenditure on environmental protection and ecological footprint from 2017 to 2021 Additionally, it examines fundamental factors including technological innovation, economic complexity, energy consumption, and urban population across 27 EU countries Utilizing a two-step Sys-GMM approach, the research effectively addresses dynamic characteristics and potential serial correlation, enhancing the reliability of coefficient estimates The Arellano-Bond test evaluates autocorrelation of error variances, while Hansen tests confirm the suitability of variables within the GMM model, ensuring robust regression results.
Empirical evidence indicates that green finance is inversely related to environmental degradation as measured by ecological footprint This relationship suggests that increased government funding for environmental protection can lead to the implementation of effective projects and regulations, ultimately reducing pollution Thus, this analysis underscores the vital role of green finance in mitigating environmental deterioration.
The findings indicate a positive correlation between economic complexity, technological innovations, urbanization, and ecological footprints in EU nations As economic complexity and urbanization increase, they contribute to economic prosperity, resulting in higher levels of consumption and pollution Similarly, technological innovations align with these trends, although they did not meet initial expectations This discrepancy can be attributed to the rise in patent numbers, which likely boosts overall resident demand, leading to increased resource consumption and deteriorating environmental conditions.
This article's research findings align with prior experimental results and address the research gap regarding the impact of green finance in European Union countries Notably, it highlights significant challenges in data collection from Cyprus, Malta, and Luxembourg Additionally, the study advances econometric techniques by employing a two-step sys-GMM regression to yield robust results.
Limitations
The research team faced challenges in data collection, leading to a limited time frame for the study Specifically, the Energy Use and Green Finance indices lack sufficient long-term data updates, while other indicators like ecological footprint, urbanization, and technology innovations were also underrepresented in previous years To maintain objectivity and accuracy, the analysis was confined to the period from 2017 to 2021.
One limitation of this study is its focus solely on European Union countries, which restricts its applicability to a broader global context As the trend of green finance has emerged only in recent years, many nations have not yet aligned with this movement, leading to a lack of updated data Consequently, the research provides empirical evidence exclusively from EU countries to maintain data consistency and reflect the unique characteristics of these nations.
As Green Finance emerges as a global trend, this research can be extended over a longer timeframe, with updated and consistent data across different continents for worldwide applicability.
Recommendation
The study highlights the impact of green finance, economic complexity, technological innovations, and urbanization on environmental degradation To reduce the ecological footprint and promote a sustainable future for generations to come, governments should consider implementing effective policy measures based on these findings.
Promoting sustainable urban development is essential as increased urbanization often leads to environmental degradation through heightened resource consumption and waste generation Policymakers can encourage this sustainability by implementing laws that prioritize green spaces, enhance public transportation, and support energy-efficient buildings This includes enforcing energy-efficient construction regulations, incentivizing the use of public transit, and allocating funds for parks and other green areas, ultimately fostering a healthier urban environment.
Encouraging research and development in clean technology is crucial for addressing environmental degradation, as recent patent trends in the European Union suggest a lack of focus on sustainable innovations Policymakers need to implement stronger incentives and promote innovation aimed at sustainable development This includes organizing more programs dedicated to renewable energy and environmental technology, as well as issuing guidelines to prioritize key technologies for research and application Additionally, enhancing rewards and securing intellectual property rights for new inventions can stimulate technological innovation, which is vital for environmental improvement and the transition to a sustainable economy.
EU policymakers should establish legislation for environmental classification, outlining criteria to identify activities that significantly contribute to environmental protection Integrating these criteria into various economic activities will enhance the shift towards sustainable development by providing clear guidelines for compliance.
The environmental criteria established by the classification system will encourage companies to initiate new projects or enhance existing ones to align with these standards By disclosing activities that meet the classification criteria, companies will provide more accurate, comparable, and reliable information, which can be effectively communicated to investors and other stakeholders in the market.
Developing investment activities in green finance is essential for sustainable development and climate change adaptation, as defined by the UNEP Program Countries transitioning to a green economy must invest wisely in natural resources, create jobs, ensure social equity, and shift from fossil fuels to renewable energy and low-carbon technologies This includes promoting efficient resource and energy use, sustainable urban development, and low-carbon transportation Establishing financial mechanisms and supportive legal frameworks will further enhance these efforts Additionally, offering incentives like tax breaks can attract investors, while utilizing the EU taxonomy can help create credible green financial products Ultimately, green finance plays a crucial role in transforming economic growth models by mobilizing capital for a greener economy, ensuring sustainable development through effective utilization of green investments.
While our study found energy consumption to be a non-significant variable, we still recommend promoting renewable fuels to combat pollution and climate change caused by fossil energy sources like coal, oil, and gas These finite resources contribute to greenhouse gas emissions and environmental harm Transitioning to renewable energy is a practical solution for environmental protection, supported by advancements in technology that enhance renewable energy utilization Policymakers can facilitate this shift by providing incentives for adopting renewable sources such as hydropower, wind, and solar energy Additionally, tax reductions for individuals and businesses that install renewable energy systems can encourage broader adoption, while supporting service providers in research and development of renewable energy initiatives is essential for future progress.
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Panel variable: ID (strongly balanced)
sum ECFP ECI GF TI EC UP
Variable Obs Mean std dev Min Max
pwcorr ECFP ECI GF TI EC UP, sig
ECFP ECI GF TI EC UP
4 Two-step SysGMM regression & related tests