Could Globalization and Renewable Energy Contribute to a Decarbonized Economy in the European Union?

Abstract

The study investigates the impact of globalization, renewable energy consumption and economic growth on CO2 emissions in 26 European Union (EU) countries for the period 1990-2020. The second-generation panel unit root tests are applied, the Westerlund cointegration test is used, and panel Fully Modified Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) techniques are employed to estimate the long-term relationship between variables. The causality relationship among variables under investigation is identified by the heterogeneous Dumitrescu-Hurlin causality test. It is found that globalization and renewable energy consumption contributed to the carbon emissions mitigation, while economic growth induced their increase. The results are robust when control variables (i.e., financial development, foreign direct investment and urbanization) are added in the model. Foreign direct investment and urbanization are contributors to carbon emissions increase whereas financial development induce their decrease. The effect of variables under consideration on carbon emissions is differentiated by the economic development and institutional quality level. Unidirectional causalities relationships were identified from globalization to carbon emissions and from carbon emissions to foreign direct investment and bidirectional relationships between economic growth, renewable energy consumption, financial development and carbon emissions. Policy implications of the findings are also discussed.