Europe's environmental dichotomy: The impact of regulations, climate investments, and renewable energy on carbon mitigation in the EU-22

Abstract

Although “COP28 UAE Leaders' Declaration” reiterated the critical importance of making finance inclusively available, the gap remains wide even across EU region, hindering the region's collective climate goals. Thus, this study takes on varying socio-economic challenges and diverse environmental policies across the EU-22 nations, and investigates the role of Government's Climate Significant Investment (GCSI) in carbon mitigation through clean energy transitions under the 2030 and 2050 climate commitments of Europe Union countries from 2007 to 2021. Using a novel panel fixed effects model, followed by dynamic panel data estimation techniques and structural equation modeling, a latent class modeling approach, the study controls for factors like Foreign Direct Investment (FDI), economic growth and urbanization. The empirical findings indicate that the effectiveness of environmental regulations in reducing carbon emissions is mediated by GCSI, which, in turn, is influenced by renewable energy transitions. This implies that regulatory measures have an indirect effect measurable through GCSI and renewables, and can be considered key performance indicators. Moreover, based on dynamic panel data estimations technique, the most of the statistically significant coefficients are found to be inelastic (<1), echoing a yet to achieve breakeven when it comes to tradeoff between environment and economic sustainability for overall EU-22 panel. Despite some high-income nations achieving significant environmental sustainability goals, uneven performance across the EU-22 highlights persistent challenges. Stricter environmental regulations have the potential to reduce carbon emissions without negatively impacting GDP. However, countries with less GCSI and FDI investment may struggle to meet climate targets, necessitating policy interventions, and government institutions to ensure green growth pathways.