Energy Economics 119 (2023) 106560

Contents lists available at ScienceDirect

Energy Economics
journal homepage: www.elsevier.com/locate/eneeco

Do green finance and innovation matter for environmental protection? A

case of OECD economies
Muhammad Umar a, b, Adnan Safi a, *
a
School of Economics, Qingdao University, Qingdao, Shandong, China
b
Adnan Kassar School of Business, Lebanese American University, Beirut, Lebanon

A R T I C L E I N F O A B S T R A C T

Keywords: As climate change has become an increasingly pressing threat, the active advent of green innovation and
Green finance reducing environmental pollution have also become the driving forces for cleaner economic growth, and a
Green innovation healthier environment. In this regard, numerous research studies have identified all the different aspects that
Carbon emissions
affect environmental pollution. However though, research studies have overlooked green finance initiatives and
Sustainable development
OECD economies
innovations’ impact on trade-adjusted CO2 emissions. Therefore, this study emphasizes upon the significance of
green finance, and green innovation in achieving sustainable development. This research study fills the gap by
studying the effect of green finance on trade-adjusted CO2 emissions, particularly in the presence of green
innovation, environmental policy stringency, international trade, and economic growth for OECD countries. In
this context, the cointegration analysis demonstrates that green finance, green innovation, environmental policy
stringency, GDP, exports, imports, and carbon emissions have a long-run association with one another. The
results of the method of movement quantile regression (MMQR) analysis show that green finance significantly
reduces carbon emissions in OECD countries. Similarly, the results for green innovation also show a significantly
negative relationship with trade-adjusted CO2 emission. The findings reveal that green finance and the in­
novations’ magnitude of impact on carbon emission is higher, specifically at the higher quantiles. Moreover,
economic growth and imports tend to have a positive impact on carbon emissions, whereas exports and envi­
ronmental policy stringency decrease carbon emissions and boost environmental quality. Policymakers and
regulators should therefore focus on green finance and green innovation, in order to mitigate trade-adjusted CO2
emissions and attain the sustainable environmental goals set by OECD countries.

1. Introduction agreement does not address other forms of environmental degradation

that comes into play. Despite the efforts of the international community,
Environmental pollution also has a significant impact on the world’s environmental degradation continues to be a major problem (Wahab
temperature. GHG emissions from human activity are the main driver of et al., 2020). Also, human activity is still the main driver of climate
climate change, and the resulting rise in temperature has several grave change, and the health effects of environmental degradation are well-
consequences for the environment and human health (Su et al., 2023). documented. The Paris agreement is a step forward in the right direc­
Climate change can also lead to more extreme weather events, damaging tion, but more concrete steps must be taken in order to solve this global
infrastructure and disrupting food production. It can also cause the sea challenge (Umar et al., 2020).
levels to rise, which can most likely lead to flooding and displacement of The notable Paris agreement, which was signed off by 195 countries
people (Qin et al., 2023; Yuan et al., 2022b). Keeping these changes in in 2015, is an initiative that aims to combat global warming and, climate
mind, the Paris agreement was created in an attempt to address the change and its adverse effects. The Paris accord mandates that all
problem of climate change. The agreement therefore sets out specific economies decrease greenhouse gas emissions and adapt to the climate
targets for reducing GHG emissions and aims to keep the world’s tem­ change impact all over the globe. However, progress towards these goals
perature from rising >2 ◦ C above pre-industrial levels (Su et al., 2022c). has been rather slow, and environmental degradation continues to be a
However, many countries are not on track to meet their targets, and the major global problem. In this regard, numerous studies have been

* Corresponding author.
E-mail addresses: [email protected] (M. Umar), [email protected] (A. Safi).

https://doi.org/10.1016/j.eneco.2023.106560
Received 12 October 2022; Received in revised form 22 January 2023; Accepted 31 January 2023
Available online 12 February 2023
0140-9883/© 2023 Elsevier B.V. All rights reserved.
M. Umar and A. Safi Energy Economics 119 (2023) 106560

carried out to address this global problem, in order to identify the transition to a low-carbon, climate-resilient economy. This involves
different aspects that affect carbon emissions. The studies investigated channeling the national cash flows towards ecologically sustainable and
have shown different determinants leading to a high level of carbon socially beneficial initiatives. In addition to this, it also involves incor­
emission, such as industrialization (Rehman et al., 2021), renewable porating environmental and social risks into investment choices. Ac­
energy consumption (Yao et al., 2019), forestry, agricultural financial cording to an expanding body of research, green finance is a new
development (Koondhar et al., 2021; Olanipekun et al., 2019), non- financial structure that tends to incorporate economic development and
renewable energy consumption (Awodumi and Adewuyi, 2020; Ban­ environmental conservation into its core agendas to address (Chen et al.,
day and Aneja, 2020), green investment (David and Venkatachalam, 2022; Rizvi et al., 2022; Wang et al., 2022). Green finance is a unique
2019; Lyeonov et al., 2019), international trade (Amin et al., 2022; financial instrument that has been introduced to solve environmental
Belloumi and Alshehry, 2020). However, the extant research literature challenges, and it embodies innovation in the area of environmental
has ignored the impact of green finance and green innovation on trade- quality (Su et al., 2022a, 2022b; Wang et al., 2019). In this regard, a
adjusted carbon emissions, particularly for the OECD economies. study by Glomsrød and Wei (2018) contended that if green bonds are
Therefore, in order to further explain the green development in OECD executed properly, a total of 4.7 GT of greenhouse gas emissions may be
economies, Fig. 1 shows the change in different innovations in the prevented by the year 2030, and renewable or eco-friendly energy
environment related technologies for OECD economies. The figure would expand from 42% to 46%. They also argued that green financing
confirms that over time, the OECD economies have shown consistent doesn’t affect the environment directly, but it supports environment-
growth in green innovations. The graphs also indicate that green inno­ conscious companies and initiatives, thus enhancing environmental
vation or eco-innovation have slowed down during the period of the quality. However, there are several barriers to green finance, such as, for
global financial crises of 2007/08 and have showed a significant nega­ instance, the lack of awareness among investors. Furthermore, the lack
tive change in the year 2010, which give an indication of the European of information and quality standards make it difficult for investors to
debt crisis. However, for the year 2011, the graph shows growth in green evaluate various green projects. Green finance resembles conventional
innovations, followed by positive growth in 2012 as well. Similar to the finance, and may boost economic growth, and because green finance is
previous research study of (Safi et al., 2021), the graph shows that still an emerging idea, there is a lack of research in this field.
during periods of instability, the growth of innovation in environmental Therefore, based on the preceding debate, it is vital to investigate
technologies fell down by significant terms. whether the present development of green finance in OECD economies
Green finance refers to a sustainable financial system that considers may help mitigate the greenhouse effect. This is especially valuable for
the environmental, social, and governance (ESG) aspects. It is an assessing and analysing the green finance development in the OECD
approach towards finance that considers the long-term effects of in­ economies. It is also evident from the above discussion that the linkage
vestments, particularly on people and the environment. The objective of between green finance, green innovation, and carbon emissions has not
green finance is to provide a financial infrastructure that facilitates the yet been investigated thoroughly. Therefore, this research study aims to

Fig. 1. Green Innovation in OECD Economies. (For interpretation of the references to colour in this figure legend, the reader is referred to the web version of
this article.)

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M. Umar and A. Safi Energy Economics 119 (2023) 106560

fill in the gap by exploring the influence of green finance (GF) and green significantly. They argued that green finance growth related finance has
innovation (GI) on consumption-based carbon (CCO2) emissions (also not just the potential to cut carbon emissions in the local area, but also in
referred to as trade-adjusted CO2 emissions) for the OECD economies. the areas surrounding it. Research studies have also shown that green
The present study has also considered important control variables such finance leads to energy efficiency, which ultimately results in the
as environmental policy, exports, imports, and economic growth, in reduction of emissions (Yu et al., 2022). Other research studies have also
order to analyse their role in the spread of carbon emissions for OECD concluded that green finance significantly reduces carbon emissions,
countries. This research identifies the actual position of the OECD and improves environmental quality (Al Mamun et al., 2022; Zhang
economies’ green development and examines its prospective impact on et al., 2022). However, the ideas of certain experts diverge from those
carbon neutrality. Moreover, the results of this study may assist poli­ that are held by the majority. For example, He et al. (2019) argued that
cymakers in developing more effective environmental measures, so as to green finance has an adverse effect on the loan issuance of banks, which
mitigate trade-adjusted CO2 emissions, and sheds fresh light on the hinders renewable energy’s investment efficiency and, in turn, nega­
impact of green financing and green innovation in lowering trade- tively affects the quality of the environment.
adjusted CO2 emissions. We have selected the OECD economies as a A study conducted by Xie and Jamaani (2022) to examine the nexus
reference point, as these countries are important due to them being the between green innovation, environmental taxes, energy productivity,
world’s largest industrialized economies. Its members include some of and CO2 emissions, for the group of G-7 economics over a time period
the most sophisticated economies in the world, including the United 1990–2020 showed that green innovation and environmental taxes in
States, Canada, Japan, and the European nations. The economies of the developed countries significantly improve environmental quality, pri­
OECD countries are among the strongest in the world, and the member marily by reducing carbon emissions. In the same manner, Yuan et al.
nations often collaborate to promote economic development and inter­ (2022a, 2022b) have evaluated the association between carbon emis­
national trade. The OECD nations account for a substantial portion of sions and environmentally friendly innovation. Their study’s results
global economic activity. In addition to this, they are home to some of revealed that green innovation cuts carbon dioxide emissions signifi­
the most sophisticated economies in the world and play a key role in cantly. Moreover, Razzaq et al. (2021) investigated green innovation
determining the global economic policy. Furthermore, the OECD nations and CO2 emissions in the top ten GDP economies over a period spanning
have worked on green development for many years and have a wealth of over the years pertaining to 1995–2018 showed that innovation in green
experience and knowledge that must be studied in depth in order to technology improves economic growth, and reduces the carbon emis­
comprehensively understand the subject. Moreover, this research has sion of a country. Similarly, (Liu et al., 2022) conducted a study on
also employed advanced econometric methodology to determine the China’s Provinces showing that green innovation significantly reduces
impact of green finance, green innovation, and environmental the intensity of CO2 emissions. They also showed that the effect is more
degradation. significant in provinces with high carbon emission intensity. At another
The next section of this article surveys the literature that has been time, (Meng et al., 2022) also showed that green innovation is the most
written on green finance, innovation, and CO2 emissions, while section 3 effective tool that can be used to mitigate greenhouse gas emissions. In
gives the methodology applied in this research study. Section 4 gives the contrast, Weina et al. (2016) conducted research on green innovation
results and discussion based around the topic, and the last part gives the and carbon emission in Italian provinces, showing that while green
conclusion and recommendations. technology has significantly raised the amount of environmental pro­
ductivity, it has not yet played a significant role in assisting the envi­
2. Literature review ronment in a beneficial manner.
A small number of studies have also evaluated the role of environ­
Several studies have evaluated the role of green finance on carbon mental policy stringency in mitigating carbon emissions. In this regard, a
emissions. According to related studies, green financing tends to in­ study by (Albulescu et al., 2022) shows that environmental policy
crease the credit limit for high-emission and high-pollution activities. It stringency significantly mitigates carbon emissions in OECD economies.
moreover offers low-interest rates to low-carbon enterprises, so as to Also, a study by (Wolde-Rufael and Mulat-Weldemeskel, 2021) for
satisfy their financing requirements, which is beneficial to the fast emerging seven economies shows that environmental policy stringency
expansion of enterprises that emit low carbon (Aizawa and Yang, 2010). has an inverted U shape relationship with environmental pollution, thus
In the same context, Zhou et al. (2020) conducted a research study to indicating that environmental pollution stringency has a positive influ­
investigate the linkages between green finance, economic growth, and ence on carbon emissions in the short run, whereas, in the long run, it
the quality of the environment. The results showed that green finance decreases carbon emissions. Similarly, in their study, (Hassan et al.,
typically improves GDP growth and also improves the quality of the 2022) also showed that both in the long and short run, environmental
environment. At another instance, Guo et al. (2022) led a research study policy stringency positively influences carbon emissions. However, the
based on China, to examine the role of finance in mitigating carbon square of environmental policy stringency negatively influences carbon
emissions. Their results revealed that green finance has a considerably emissions, thus indicating an inverted u-shaped relationship. In contrast,
negative direct influence on carbon emissions, but its indirect impact on (Baloch and Danish, 2022) argue that environmental regulations posi­
the surrounding provinces is insignificant. M. A. Khan et al. (2022) tively influence carbon emissions for BRICS economies.
investigated the impact of green financing on the environmental Several research studies have been conducted on the relationship
degradation of twenty-six Asian economies. Their empirical results have between international trade (imports & exports) and economic growth
indicated that green finance has decreased the influence on the envi­ on carbon emissions, which have been taken as control variables in this
ronment and is eco-friendly as well. In their study, Azhgaliyeva et al. research study. Studies have also been conducted to explore the impact
(2019) revealed that private investments in environmentally friendly of imports and exports on carbon emissions, considering the newly
technologies lead to a decline in carbon emissions, and shift the econ­ established consumption-based carbon (CCO2) emissions. The previous
omy into a low-carbon and green economy. Also, in this regard, Sharif studies’ findings indicate that imports significantly enhance trade-
et al. (2022) investigated the impact of green finance and technological adjusted carbon emissions. In contrast, exports significantly reduce
innovation on carbon emissions. According to the findings of their trade-adjusted emissions (see, for example (Hassan et al., 2022; Liddle,
research, the introduction of new environmentally friendly technolo­ 2018)). Similarly, studies on the linkages between economic growth
gies, and the provision of environmentally responsible funding, both have concluded that economic growth significantly contributes towards
have a considerable and negative effect on the CO2 emissions that are environmental pollution, as it increases energy consumption in the
released into the environment. Similarly, Chen and Chen’s (2021) study country, which leads to an increase in carbon emissions (Awodumi and
on China also revealed that green finance reduces carbon emissions Adewuyi, 2020; Banday and Aneja, 2020; Yao et al., 2019).

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M. Umar and A. Safi Energy Economics 119 (2023) 106560

Based on the above discussion, it is evident that the linkages between green innovation, GDP is the economic growth indicator of OECD
green finance, green innovation, and environmental pollution have not economies, EX shows exports, IM denotes imports, EPS is environmental
yet been investigated thoroughly, especially considering trade-adjusted policy stringency, the parameters are shown by α1− 6, and finally, the
carbon emission. Unlike the previous research studies conducted by error term is given by ε in the equation. The factors in the above
Chen and Chen (2021), Guo et al. (2022) and Zhou et al. (2020), who equation are selected based on the strong theoretical background of the
have investigated and observed the influence of green finance on carbon previous research studies. Earlier studies have ignored the influence of
emission by taking into consideration the territorial-based carbon green finance on carbon emissions adjusted for trade, in the existence of
emission, and have overlooked the newly developed consumption-based green innovation for OECD economies. We have therefore selected green
CO2 emissions that consider import and exports, while measuring the finance as an independent variable in this study to fill the gap in the
carbon emissions of a country. In other words, production or territorial- literature. For this, we argue that green finance is a financial framework
based CO2 emissions refer to the overall emissions resulting from the that takes environmental, social, and governance (ESG) risks and pos­
production of products and services inside a territory, regardless of sibilities into account. It is a method that is used for directing resources
whether these commodities are exported or consumed domestically. towards initiatives that tend to have a favorable effect on the environ­
Whereas in contrast, consumption-based carbon emissions relate to the ment and society, while simultaneously creating financial rewards.
overall emissions from the consumption of goods and services inside a There are a variety of methods by which green money may benefit the
country, regardless of where these commodities were produced. environment. Green money may, for instance, be used to fund energy
Therefore, this research study fills in the gap by exploring the influence efficiency and renewable energy projects, which can help decrease
of green finance (GF) and green innovation (GI), on the trade-adjusted greenhouse gas emissions and battle climate change as well. Green
CO2 emissions for OECD economies. The present study has also money may also be used to fund programs to restore and preserve eco­
considered important control variables such as the environmental pol­ systems, such as the reforestation and wetland restoration. In addition to
icy, exports, imports, and economic growth to analyse their role in the immediate environmental advantages, green financing may also
carbon emissions for OECD countries. It must be noted that we have contribute towards job creation, economic expansion, and poverty
selected the OECD economies, as they are the world’s largest industri­ reduction (Chen and Chen, 2021; Khan et al., 2022). Moreover, we have
alized economies, and hence high in terms of their importance and also taken green innovation as a determinant of carbon emission.
contribution to the world. They are also the most influential countries in Innovation in green technology has the greatest impact on environ­
the world. Furthermore, OECD economies are some of the world’s most mental quality, particularly by lowering pollution and other environ­
advanced economies and play a significant role in defining the global mental hazards. This may be accomplished in several ways, such as by
economic policy. The OECD countries have worked on green develop­ inventing into new technologies that are more efficient and have a
ment for many years and have a considerable amount of experience and smaller environmental effect, or by discovering newer ways to utilize
information that must be explored to comprehensively understand the current technologies in order to lessen their environmental impact.
subject. Moreover, this research has employed advanced econometric Additionally, innovation in green technology may lead to the creation of
methodology to determine the effect of GF, GI, and environmental new environmentally friendly goods and services, which can help lessen
pollution. the total effect of human activities on the environment. Based on the
previous studies on this discipline (Albulescu et al., 2022; Hassan et al.,
3. Research design 2022), well-designed environmental policies stimulate innovation,
which then increases the enterprises’ productivity. Environmental pol­
This research studies the effect of green finance and innovation on icy regulations benefit society and companies, and strict environmental
environmental pollution in the existence of environmental policy regulations may help in reducing CCO2 emissions and pollution. Eco­
stringency, economic growth, exports, and imports for the OECD nomic growth is expected to increase CCO2 emissions, as output growth
countries. The time period taken for this study spans from 1990 to 2020. enhances energy consumption that is positively connected with envi­
We have taken into consideration this specific time period due to the ronmental deterioration. Similarly, it is also anticipated that imports
easy and availability of the data. The data for consumption-based carbon positively impact CCO2 emissions, since merchandise made in other
(CCO2) emissions are quantified in MtCO2e Million tons, collected from countries and consumed in OECD nations increases the energy con­
the database of global carbon atlas that has been put forward by (Peters sumption, and hence positively impacts the CCO2 emissions. In contrast
et al., 2011). In addition to this, green finance is taken as the budget to this, exports are often associated with new technologies that reduce
spent on renewable energy public R&D. Therefore, green innovation in energy use and emissions (Liddle, 2018; Wahab et al., 2020).
this study is calculated as the environment-related technologies growth
to the percent of all technologies, and we have obtained the data from 3.2. Empirical methodology
the OECD database for green innovation. Environmental policy strin­
gency (EPS) has also been taken from the OECD database, which mea­ In this section, the descriptive analyses have been performed
sures the percentage of energy consumed per unit. The data for initially, followed by cross-sectional dependency analysis and slope
economic growth (the gross domestic product), imports, and exports has heterogeneity analysis. Then, the unit-root analysis, cointegration
been obtained from the world bank indicators. analysis, moment quantile regression, and finally, granger causality
analysis have been applied to the data. These methods are explained in
detail below in this section. Fig. 2 shows the methodology employed in
3.1. Rationale of the study this study.
Before empirically evaluating the data, the current work uses sta­
The present study is focused on the linkages that exist between green tistical analysis to characterize them. In this regard, we have investi­
finance, innovation, and CCO2 emissions, particularly in the presence of gated the mean, median, and range estimates. The standard deviation
environmental policy stringency, imports, exports, and GDP. Following tells how much each variable deviates from the mean value, and how
the earlier studies, the econometric model is as follows: volatile a variable is. To evaluate the data normality in this study, we
CCO2i,t = α0 + α1 GFi,t + α2 GI i,t + α3 GDPi,t + α4 EX i,t + α5 IM i,t have employed two metrics, i.e., skewness and kurtosis. The expanded
(1) measure of normality of the data has also been used for the data dis­
+ α6 EPSi,t + εi,t …….
tribution. Regarding this, we have employed the Jarque and Bera (1987)
CCO2 in the above equation shows the consumption-based carbon normality test analysis.
emission of the OECD countries, while GF is the green finance, GI shows In this research study, before empirically examining the linkages

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M. Umar and A. Safi Energy Economics 119 (2023) 106560

Fig. 2. Methodology Design.

between the considered variables, we have examined the cross-sectional the stationarity of the data. This method has been chosen over the others
dependency of the data, which is an important factor to determine as the Pesaran’s unit root test considers the SH and CD variables. In this
before carrying out further empirical analysis. Without a proper study, we have also used Pedroni’s (2004) cointegration analysis
econometric tool, cross-sectional dependency (CD) among the panels method to determine the linkages between green finance, green inno­
can lead to inaccurate results. Therefore, we have taken into account the vation, exports, GDP, imports, environmental policy stringency, and
(Pesaran, 2004) cross-sectional dependence (CD) method. The equation CCO2 for OECD economies. The reason for taking into account Pedroni’s
cd test is given as: cointegration analysis is due to the fact that the previous methods such
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
( ) [∑ ] as the random and fixed effects, cannot consider CD in the error terms,
and thus can lead to inaccurate test analysis results.
N− 1 ∑N
2T
CD = ρij …….
̂ (2)
N(N − 1) i=1 j=i+1 We used the method of Moment Quantile Regression (hereafter
MMQR), in order to check the relationship between the variables. The
In this study, we have also employed the slope heterogeneity (SH) MMQR is a statistical methodology for estimating a data set’s quantiles.
technique put forth by Pesaran and Yamagata (2008) that considers the The technique of moments quantile regression, unlike the other ap­
CD related problems. Slope heterogeneity is therefore given as follows: proaches, such as the least squares method, does not need the data to be
() normal. This makes the approach more robust since it is less likely to be
( )
impacted by outliers. In this regard, Koenker and Bassett (1978) initially
− 1
ˇ 1 ˇ
(3)
1 2
Δ = (N)2 (2k) S − k …….
N proposed the Panel Quantile Regression methodology, which calculates
the conditional mean and the dependent variance, depending on the
The bias-adjusted equation of the Δ̃test can be given as follows:
values of the explanatory parameter. If the distribution characteristics of
()
the dataset are irregular, the quantile regression produces accurate es­
( )− 12 ( )
ˇ 2k(T − k − 1) 1 ˇ timations. Due to the non-normal distribution of the data, this research
(4)
1
Δ Adj = (N)2 S − 2k …….
T +1 N has resorted to the use of Machado and Silva (2019) novel MMQR. This
innovative method analyses the distributional and heterogeneous
After the results of these tests come through, we can accurately
properties of the quantile numbers (Sarkodie and Strezov, 2019). For
determine the unit root analysis fit for our study. In this study, we have
this purpose, we have used the following equation to approximate the
taken into consideration the Pesaran’s (2007) unit root test to determine
conditional quantile location-scale Qy(τ| R) variant:

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M. Umar and A. Safi Energy Economics 119 (2023) 106560

Yit = γi + αRit + (σ i + φX́ it )μit (5) The values of the control variables are shown in the table as well.
Furthermore, the descriptive statistics results also reveal that the values
Where the probability is identified by p(σ i + φ.X́it > 0) = 1, While γ, for skewness and kurtosis range from 0 to 3, which is outside of the
α, σ and φ are the predicted coefficients. The subscript (i) indicates the statistical limitations, thus demonstrating that the data go along an
fixed effect, as suggested by γi and σ i (i.e., i = 1, 2, …, n). Moreover, the irregular path. To further confirm that the data path is irregular in this
k-vector of standard elements of R is shown by X, which is a charac­ study, we employed the Jarque and Bera (1987) normality analysis. The
teristic variation with component l, as seen below: results of the Jarque-Bera normality analysis, as shown in Table 1, are
Xl = Xl (R), l = 1, 2, …, k (6) significant for all the selected variables except for GI. This essentially
demonstrates that the null hypothesis of the data being normally
Where Rit is distributed uniformly and independently for all fixed i distributed is rejected. This also confirms that all the variables are non-
and time (t). In contrast to Rit, it is orthogonal to i and t (Machado and normally distributed except for GI, which is insignificant in nature. In an
Silva, 2019). This helps components to maintain stability and prevents empirical analysis-based study, determining the normality of variables is
external behavior. Thus, Eq. (5), …, Eq. (7) are expected to have the vital since non-normal data needs the use of an appropriate estimator to
following general form: study the relationship between the variables.
Moving on, the Table 2 CD test analysis significant values show that
Qy (τ|Rit ) = (γ i + σi q(τ) ) + αRit + φX́ it q(τ), (7)
the panels are correctionally dependent on each other. Similarly, in
Where Eq. (7) illustrates that Rit is the explanatory variables’ vector, Table 3, the SH test analysis in both the models are highly significant,
including GF, GI GDP, IM, EX, and EPS. All the mentioned variables are thus demonstrating that a level of heterogeneity exists among the
taken into their natural logarithms for empirical examination. In this panels. Due to these two test results, we cannot employ the first-
regard, the dependent variable quantile distribution (Yit and captured generation analysis, and therefore, have used Pesaran’s (2007) Unit
CCO2 in this context) is conditional on Rit, and the explanatory variables’ Root Analysis, which can handle CD and SH.
location, as depicted by the right side of the aforementioned equation. In The outcomes of the unit root analysis have revealed that all the
addition to this, the − γ i(τ) ≡ γi + σi q(τ) is a scalar coefficient that rep­ variables are stationary at the level, except for CCO2 and GF, which are
resents the fixed effect of τ quantiles for i. Comparatively, it has been stationary at the first difference. Therefore, following the unit root re­
observed that the singular impact does not affect the intercept. Het­ sults of Table 4, we have employed the cointegration analysis technique,
erogeneous impacts are likely to change since the variables are time- put forward by Pedroni (2004).
invariant. Finally, q(τ) denotes the quantiles’ τ − th sample, which this The cointegration analysis results have been provided in Table 5. The
research evaluates four, namely 25th, 50th, 75th, and 90th. Therefore, cointegration analysis of Model (1) confirms the long run cointegration
the equation for the quantile in this study can be given as follows: between GF, IM EX, GDP, EPS, and CCO2. Similarly, in Model (2), we
∑∑ have included GI, which has also had a significant long-run relationship
minq δτ (Rit − (σ i + φX́ it ).q ) (8) with carbon emissions. The two models in Table 5 are highly significant,
and confirm the long-term stable relationship between GF, GI, IM, GDP,
i t

Where δτ(A) = (τ − 1)AI{A ≤ 0} + TAI{A > 0}, uncovers the check EX, EPS, and CCO2.
function. After validating the long-run cointegration between the factors and
The above MMQR analysis fails to check the causality between the analysing the normality of the data using Jarque and Bera (1987)
variables, but only examines them at a certain scale and location. normality analysis, in this study, we have employed the MMQR analysis
Therefore in this study, we have used the panel data causality estima­ that can deal with non-normal data distribution, and also provides the
tion, put forward by Dumitrescu and Hurlin (2012). The granger cau­ results at a specific location, scale, and quantiles. The results for Model-1
sality analysis addresses the unbalanced panel more efficiently and are given in Table 5, which show the specific results for CCO2, GF, GDP,
effectively. It also handles the panel data heterogeneity and cross- IM, EX, and EPS. The results show that a percent change at the quantile
sectional dependence. Q0.50, Q0.75, and Q0.90 in GF causes − 0.0508%, 0.0804%, and 0.1073%
decrease in CCO2, respectively. Whereas, at the 25th quantile, the values
4. Results and discussion are negative but insignificant in nature. The values from lower to higher
quantiles have a significant change in magnitude, indicating that the
The results of this study are presented in this section. Firstly, Table 1 negative influence of green finance tends to increase in the higher
gives the descriptive statistics that describe the main features of the data quantiles. This can be explained by the fact that green finance is a
set in a concise manner. Table 1 gives an overview of the data before a financial framework that considers environmental, social, and gover­
more detailed statistical analysis is performed. Results reveal that the nance (ESG) risks and possibilities. It is a method for directing resources
mean value for carbon emission (CCO2) is 2.371, with a minimum of towards initiatives that have a favorable effect on the environment and
1.644 and a maximum value of 3.821, thus showing a standard deviation society, while simultaneously creating financial rewards. There are,
of 0.534, which is the highest deviation among the variables. The mean therefore, a variety of methods by which green finance may benefit the
value for green finance (GF) is also positive, with a minimum value of environment. Green money may, for instance, be used to fund energy
− 1.022, and a maximum value of 1.912, with a standard deviation of efficiency and renewable energy projects, which can help decrease
0.353. Similarly, green innovation has a mean of 0.955 with a maximum greenhouse gas emissions and battle climate change. Green money may
value of 1.411, a minimum of 0.48, and a standard deviation of 0.152. also be used to fund programs, in order to restore and preserve

Table 1
Descriptive Analysis.
Variables Mean SD Min Max Skew Kurt Jarque-Bera p-value

CCO2 2.371 0.534 1.644 3.821 0.756 3.03 62.0200 <0.001

GF 1.245 0.353 − 1.022 1.912 − 1.336 6.547 534.9000 <0.001
GDP 11.865 0.526 10.88 13.3 0.572 2.844 36.1500 <0.001
IM 1.498 0.201 0.841 1.921 − 0.333 3.534 19.7900 <0.001
EX 1.504 0.227 0.945 1.942 − 0.28 2.729 10.4800 <0.001
EPS 0.27 0.246 − 0.681 0.616 − 0.868 3.044 81.8600 <0.001
GI 0.955 0.152 0.48 1.411 0.069 2.86 1.0470 0.5926

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M. Umar and A. Safi Energy Economics 119 (2023) 106560

Table 2
CD Analysis.
Variables CCO2 GF GDP IM EX EPS GI

Stat 23.05 *** 14.42*** 73.95 *** 58.32 *** 53.09** 70.67*** 47.00***
Abs(Corr) 0.532 0.354 0.917 0.75 0.677 0.876 0.585

Note: *** shows 1% significance level.

effect of green finance on trade-adjusted CO2 emissions becomes higher

Table 3
in the high quantiles, as compared to the lower ones. This further il­
Slope heterogeneity analysis.
lustrates graphically the results obtained in Table 6.
Model-1 Model-2 Table 7 also shows the results for GF and carbon emissions, further
CCO2 GF GDP IM EX CCO2 GF GDP IM EX EPS
confirming the previously obtained results. Moreover, Table 7 gives the
EPS GI
results for Model (2), indicating the influence of green innovation on
Stat Stat CCO2 emissions. It has been observed that the outcomes indicate a
Delta tilde (Δ̃_H) 23.298*** 20.843 *** percent change in GI at Q50, Q75, and Q90 tends to decrease the CCO2 by
Delta tilde Adjusted (Δ̃ − 0.0515%, − 0.0799%, and − 0.1053%, respectively. These outcomes
26.479*** 24.198***
_AH)
reveal that innovation in green technology has the greatest impact on
Note: *** shows 1% significance level. environmental quality, primarily by lowering pollution and other
environmental hazards. The OECD countries have achieved this in
various ways. They have created new technologies that are more effi­
Table 4 cient and have a lesser environmental impact, and have also identified
Unit Root Test.
newer methods to employ existing technology, in order to reduce their
Variables At I (0) At I (1) environmental impact. In addition to this, innovation in green tech­
CCO2 − 1.478 − 5.509*** nology results in the invention of new environmentally friendly products
GF − 3.282*** – and services, which helps to reduce the overall effect of human activities
IM − 2.254** – on the environment. Additionally, Green innovation contributes to­
GDP 1.621 − 3.595***
−
wards the development of innovative technologies that can reduce
EPS − 3.579*** –
GI − 3.190*** greenhouse gas emissions. Developing advanced eco-friendly and more
efficient energy production techniques is another green innovation that
Note: *** and ** shows 1% and 5% significance level.
helps improve the quality of the environment. Research studies by (Safi
et al., 2022; Weina et al., 2016; Xie and Jamaani, 2022) also support the
Table 5
findings of the current study. Similarly, the results of the control vari­
Cointegration analysis. ables such as the GDP and IM show a positive relationship with carbon
emissions, consistent with the previous research studies (Wahab et al.,
Statistic p-value
2020). In contrast, the results for EX and EPS show a negative effect on
Model (1) the carbon emissions, which are also consistent with (Wahab et al.,
CCO2 GF GDP IM EX EPS
2020).
Modified Phillips-Perron t 2.3960*** 0.0083
Phillips-Perron t − 2.9309*** 0.0017 Fig. 4 visually shows the effect of all the above-mentioned factors in
Augmented Dickey-Fuller t − 2.7601*** 0.0029 specified quantiles. The figure also shows that the negative effects of
green innovation on trade-adjusted CO2 emission become higher in high
Model (2) quantiles, as compared to the lower ones. This further illustrates
CCO2 GF GDP IM EX EPS GI graphically the results obtained in Table 7.
Modified Phillips-Perron t 3.2061*** 0.0007 The MMQR analysis has provided the impact of each variable on
Phillips-Perron t − 3.1351*** 0.0009
CCO2 emissions (see Fig. 5), however, there is still a need to check the
Augmented Dickey-Fuller t − 3.3736*** 0.0004
causal relationship among the variables. Therefore, in this study, we
Note: *** shows a 1% significance level. have used Dumitrescu and Hurlin (2012) causality analysis to further
robust check the results. The results of Dumitrescu and Hurlin (2012)
ecosystems, such as reforestation and wetland restoration. Through in­ granger causality analysis are given in Table 8. The outcomes of the
vestments in renewable energy, clean transportation, and sustainable analysis observe the association that pertains to green finance, green
infrastructure, green finance impacts the environment. It also encour­ innovation, economic growth, exports, imports, and environmental
ages energy conservation and efficiency. Moreover, when it comes to the policy stringency, with carbon emissions. The results indicate that any
immediate environmental advantages, green financing may contribute strategy focusing on these factors would considerably enhance the
towards job creation, economic expansion, and poverty reduction (Chen quality of the environment. Concentrating on these aspects to cut carbon
and Chen, 2021; Khan et al., 2022). emissions and enhance the quality of the environment might help the
The results for the control variables GDP show a significant positive OECD economies to accomplish their sustainable development
impact on CCO2 emission from 1.0054 to 0.9198, from lower to higher objectives.
quantiles, and this indicates that the influence of economic growth be­
comes lower at higher quantiles. Similarly, the results for imports have a 5. Conclusion, policy suggestions, limitations, and future
significant and positive effect on carbon emission, and the magnitude of perspectives
impact becomes lower from a lower quantile to a higher quantile. The
results for EX and EPS also show a negative impact on carbon emission, 5.1. Conclusion
further confirming the previous research studies (Amin et al., 2022;
Wahab et al., 2020). In the year 2015, 195 countries joined the Paris accord, in order to
The effect of all the above-mentioned factors is also shown visually in address climate change and its implications. The accord mandates that
specified quantiles in Fig. 3. The figure also shows that the negative all nations cut carbon emissions and adjust to the impact of climate

7
M. Umar and A. Safi Energy Economics 119 (2023) 106560

Fig. 3. MMQR Graph for Model-1.

Table 6
Regression Analysis (Model-1).
Dep. CCO2 Quantiles

Location Scale 0.25 0.50 0.75 0.90

GF − 0.0496** − 0.0347*** − 0.0175 − 0.0508** − 0.0804*** − 0.1073***

(0.0218) (0.0125) (0.0253) (0.0219) (0.0241) (0.0292)
GDP 0.9748*** − 0.0331*** 1.0054*** 0.9736*** 0.9454*** 0.9198***
(0.0143) (0.0082) (0.0166) (0.0144) (0.0159) (0.0192)
IM 1.2185*** − 0.2170*** 1.4196*** 1.2108*** 1.0253*** 0.8574***
(0.1038) (0.0594) (0.1203) (0.1044) (0.1148) (0.1391)
EX − 1.1228*** 0.2135*** − 1.3206*** − 1.1152*** − 0.9328*** − 0.7676***
(0.0831) (0.0475) (0.0962) (0.0838) (0.0923) (0.1112)
EPS − 0.3447*** − 0.0105 − 0.3350*** − 0.3451*** − 0.3541*** − 0.3622***
(0.0299) (0.0171) (0.0346) (0.0299) (0.0328) (0.0401)
_cons − 9.1776*** 0.5484*** − 9.6858*** − 9.1579*** − 8.6892*** − 8.2648***
(0.2217) (0.1269) (0.2568) (0.2234) (0.2460) (0.2969)

Note: In parentheses () the standard errors are provided and *, **, and *** shows 10%, 5% and 1% significance.

change. However, the empirical progress towards these objectives has results of the MMQR analysis show that green finance significantly re­
been sluggish at best, and environmental degradation remains a signif­ duces carbon emissions in OECD countries. Similarly, the results ob­
icant worldwide issue. Several research projects have been undertaken tained for green innovation show a significant negative relationship
to discover the various factors that impact carbon emissions, in the with carbon emissions. The control variables, that is the imports and
hopes to solve this global issue. This research therefore fills the gap by GDP, positively affect carbon emission, whereas environmental policy
inspecting the role of green finance and innovation on carbon emission, stringency and exports reduce CCO2 emissions in the case of OECD
in the existence of environmental policy stringency, GDP, imports, and economies.
exports for OECD economies. We have taken into account the OECD
economies as these countries are the world’s largest industrialized
economies. In addition to this, advanced econometric methods have 5.2. Policy suggestions
been used to inspect the association among the factors in this study. The
cointegration analysis demonstrates that green finance, green innova­ Following the results of this study, the OECD countries should ideally
tion, GDP, exports, imports, environmental policy stringency, and car­ focus on the further increase and advancement of green financing for
bon emissions have a long-run association with each other. Also, the their economic growth. According to research, higher investment in
green finance is better suited to adapt to climate change and cut

8
M. Umar and A. Safi Energy Economics 119 (2023) 106560

Table 7
Regression Analysis (Model-2).
Quantiles

Location Scale 0.25 0.50 0.75 0.90

GF − 0.0507** − 0.0326*** − 0.0203 − 0.0515** − 0.0799*** − 0.1053***

(0.0215) (0.0124) (0.0251) (0.0216) (0.0237) (0.0289)
GDP 0.9690*** − 0.0287*** 0.9957*** 0.9683*** 0.9433*** 0.9210***
(0.0145) (0.0083) (0.0169) (0.0146) (0.0160) (0.0195)
IM 1.2352*** − 0.2065*** 1.4273*** 1.2302*** 1.0503*** 0.8896***
(0.1026) (0.0588) (0.1194) (0.1030) (0.1131) (0.1376)
EX − 1.1499*** 0.2098*** − 1.3450*** − 1.1447*** − 0.9620*** − 0.7987***
(0.0830) (0.0476) (0.0966) (0.0836) (0.0918) (0.1112)
EPS − 0.3151*** − 0.0079 − 0.3078*** − 0.3153*** − 0.3222*** − 0.3283***
(0.0344) (0.0197) (0.0399) (0.0343) (0.0377) (0.0461)
GI − 0.0757* − 0.0158 − 0.0610 − 0.0761* − 0.0899** − 0.1022*
(0.0413) (0.0237) (0.0480) (0.0413) (0.0453) (0.0555)
_cons − 9.0279*** 0.4982*** − 9.4912*** − 9.0156*** − 8.5816*** − 8.1940***
(0.2340) (0.1342) (0.2723) (0.2351) (0.2580) (0.3138)

Note: In parentheses (), the standard errors are provided, and *, **, and *** show 10%, 5%, and 1% significance.

Fig. 4. MMQR Graph for Model-2.

emissions. This is due to their exceptional ability for innovation and In order to lessen CO2 emissions, it is imperative that OECD countries
technological development. The outcomes of this study establish that invest in green innovation. This means investing in renewable energy
policies that promote green finance may be an effective means to sources, like wind power and solar, as well as new technologies that can
decrease carbon emissions. help us use energy more efficiently. OECD economies must eliminate
There are many ways in which green money may have good envi­ fossil fuel subsidies, and at the same time replace them with support for
ronmental effects: (1) Green financing may facilitate the transition to a low-carbon technology. This will level the playing field and make
low-carbon economy, by directing funds towards low-carbon and sus­ renewable energy more competitive. Moreover, OECD economies raise
tainable developments. (2) Green financing may also stimulate private energy efficiency requirements for new buildings and appliances by
sector investment in low-carbon and sustainable technology and enter­ using green innovation technology. This will aid in reducing global
prises. (3) Green finance may assist financial organizations in identi­ energy consumption and, therefore, eventually emissions. Lastly, we
fying, evaluating, and managing environmental risks and opportunities. must also increase the public’s understanding of the problem of climate
(4) Green finance may also assist financial decision-makers in enhancing change and the need to cut emissions. This will assist in the generation of
their knowledge of environmental risks and possibilities. the required political influence, which will then influence the adoption

9
M. Umar and A. Safi Energy Economics 119 (2023) 106560

Fig. 5. Long-run association between key variables and CCO2.

harnessing the power of green finance and identifying any possible

Table 8
impediments to its widespread adoption. Given the global character of
Causality analysis.
the climate change problem, future studies might also focus on analysing
Direction W-bar Z-bar Stat p-value green financing, innovation, and carbon emissions at the corporate
GF → CCO2 2.056 3.423 0.001 level. Future studies might focus on comparing green financing and
IM → CCO2 3.411 7.811 0.000 innovation in developing economies to those of established nations.
EX→ CCO2 3.234 7.240 0.000
GDP → CCO2 2.884 6.105 0.000
EPS → CCO2 2.800 5.834 0.000 CRediT authorship contribution statement
GI → CCO2 3.093 6.783 0.000
Muhammad Umar: Conceptualization, Methodology, Supervision,
Project administration, Writing – original draft, Writing – review &
of these reforms.
editing. Adnan Safi: Conceptualization, Data curation, Software, Vali­
Based on the findings of this study, OECD economies should tighten
dation, Writing – original draft.
the environmental rules more, in order to cut carbon emissions. Also, to
limit carbon emissions, environment related regulatory policies may
need to be stricter than previously believed. Particularly, laws may need
Declaration of Competing Interest
to target both fossil fuel production and consumption. Environmental
rules reduce carbon emissions more effectively in nations with higher
None.
incomes and slower economic growth. Wealthy nations are better
equipped to invest in cleaner technologies and have more to lose by
polluting their environment. Furthermore, if the government were to Appendix A. Supplementary data
implement stricter environmental rules to minimize carbon emissions,
energy and transportation costs would probably increase. This might Supplementary data to this article can be found online at https://doi.
have a detrimental impact on the economy, as increasing costs could org/10.1016/j.eneco.2023.106560.
result in inflation, and an eventual decline in buying power. In addition
to this, these laws may also result in employment losses in the energy References
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