Environmental and Resource Economics

https://doi.org/10.1007/s10640-024-00922-6

Green Financing, Energy Transformation, and the Moderating

Effect of Digital Economy in Developing Countries

Rabindra Nepal1 · Yang Liu2 · Kangyin Dong2 · Tooraj Jamasb3

Accepted: 2 September 2024

© The Author(s) 2024

Abstract
The energy sector in many developing nations faces the difficulty of insufficient financing
throughout the low-carbon transition, highlighting the importance of international green
financing in alleviating financial constraints. The advancement of digital technology could
facilitate green financing for energy transition in the digital economy, but this statement
lacks empirical evidence. The primary objective of this research is to investigate the im-
pact of international green financing on low-carbon energy transformation in developing
nations. Additionally, we investigate the moderating role of digital economy between the
two. Our findings validate the favorable impact of international green financing on low-
carbon energy transformation, and this impact is particularly evident for hydro and wind
energy consumption. We show that this beneficial effect is greater for low-income coun-
tries or regions with high levels of energy transition. We also provide evidence of the
positive moderation effects of digital economy and find that its effects are still present in
the transition to hydro and wind energy. This research helps to broaden green financing
channels for the energy sector in developing countries, especially from the perspective of
digital economy.

Keywords Green Financing · Low-carbon Energy Transformation · Digital Economy ·

Moderation Effect · Global case

JEL Classification Q42 · O33 · G23 · C23

Tooraj Jamasb
[email protected]
Kangyin Dong
[email protected]
1
School of Business, Faculty of Business and Law, University of Wollongong, Wollongong,
Australia
2
School of International Trade and Economics, University of International Business and
Economics, Beijing 100029, China
3
Copenhagen School of Energy Infrastructure, Department of Economics, Copenhagen
Business School, Frederiksberg, Denmark

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 R. Nepal et al.

1 Introduction

Renewable energy has emerged as a pivotal element in the energy transition, driven by
mounting global apprehension regarding climate change and environmental sustainability
(Wei et al. 2023). Recently developed low-carbon energy technologies, such as those in
solar, wind, and hydropower, have garnered considerable traction and acceptance (Li et
al. 2023). The transition to low-carbon energy necessitates a departure from conventional
high-carbon energy sources towards sustainable, low-emission alternatives like wind, solar,
hydro, and biomass. These sources are abundant, cost-effective, and environmentally benign
(Blazquez et al. 2020; Chen et al. 2022). Nonetheless, the shift towards low-carbon energy
sources demands sustained and augmented investment (IEA 2022a). It is noteworthy that
despite developing economies constituting two-thirds of the world’s population, they repre-
sent only one-fifth of clean energy investments (IEA 2021). Accounting for only a quarter
of the per capita emissions of developed countries, developing economies are projected to
increase their carbon emissions by 5 gigatonnes over the next 20 years under current policy
scenarios (IEA 2021). Therefore, supporting developing countries in enhancing their energy
systems through robust green financing initiatives is crucial as they constitute the corner-
stone of future emissions reduction efforts.
Developing economies face persistent challenges in mobilizing green financing for clean
energy projects. The COVID-19 pandemic, alongside other socio-economic and climatic
risks, exacerbates the challenge of accessing clean energy financing for developing econo-
mies, placing them at a disadvantage in steering the low-carbon energy transition (Oliyide
et al. 2023). Public finance plays a crucial role in facilitating financeable renewable energy
development projects for developing countries. The World Bank has allocated over $2 bil-
lion in financing for distributed renewable energy solutions, predominantly in sub-Saharan
Africa. Nevertheless, by 2030, the global community will require $90 billion in public fund-
ing for clean energy innovation demonstration projects, whereas the current budget stands
at only $25 billion (IEA 2022b; Li et al. 2023). Simultaneously, governments of developing
countries are striving to expand access to finance and attract private investment for scalable
renewable energy projects. This is crucial for the deployment of clean energy initiatives in
vulnerable communities and remote areas of developing nations (Duran and Sahinyazan
2021).
International financing has greater potential for growth and research impact compared
to domestic financing, which has been studied more extensively. Approximately 25%
of energy investments in emerging economies are sourced internationally, a proportion
expected to rise further (IEA 2021). Over the past two decades, there has been a clear trend
of growth in international green financing available to developing countries to support clean
energy research and development (R&D) and renewable energy production (see Fig. 1).
However, there is still a lack of sufficient empirical evidence to support the contribution of
international green financing in driving a low-carbon energy transition in developing coun-
tries. Investigating the role of international green finance in offering financing solutions for
developing economies to facilitate the low-carbon energy transition constitutes a primary
objective of this study.
The digital economy is experiencing widespread adoption and growth in emerging coun-
tries. Since the inception of the Digital India program in 2015, India has been actively
cultivating its digital economy ecosystem, poised to generate a potential economic gain of

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Green Financing, Energy Transformation, and the Moderating Effect of…

Fig. 1 Developing countries with access to green financing and green financing flows in specific
years. Note: Relevant data are from OECD and IREAN and are expressed in constant 2020 USD

$1 trillion by 2025 (MEIT 2019). China’s digital economy is projected to reach 50.2 tril-
lion yuan (approximately $6.94 trillion) in 2022, boasting a nominal growth rate of 10.3%
year-on-year (CAICT 2023). Numerous studies have demonstrated that the digital economy
is emerging as a crucial facilitator of the low-carbon transition (Hwang 2023). Long-term
information and communications technology (ICT) development can contribute to driving
green energy production in a country, particularly when factoring in installation costs (Luo
et al. 2024). On the other hand, digital economy and technology have the potential to influ-
ence the development of green finance by fostering technological innovation and enhancing
linkages among market participants (Huo et al. 2022; Kumar et al. 2022). Enhanced infor-
mation sharing and cost control are recognized as significant benefits of the digital economy
in addressing the limitations of traditional finance in advancing the energy transition (Tang
et al. 2022). Investigating the influence of digital economy development on the advantages

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of green finance within the energy transition framework constitutes another primary objec-
tive of this work.
Previous studies have extensively investigated the connections between green financing
and energy transition (Bai and Lin 2023), energy retrofitting (Caporale et al. 2023; Zhang et
al. 2022a), and green transformation (Wang et al. 2021, 2022). Existing literature predomi-
nantly focuses on domestic financing. As mentioned previously, international financing
flows have emerged as a key strategy for addressing the financing of clean energy projects in
developing countries. However, existing studies have provided limited quantitative analysis
regarding the scale of the impact of international green financing. On the other hand, there
remains a lack of empirical evidence on the interaction between the digital economy and
green financing amidst the context of low-carbon transition and the rapid development of
digital technologies. To address these research gaps, we utilize panel data from 32 countries
spanning the period from 2003 to 2020 to investigate the relationship between international
green financing and the low-carbon energy transition. Additionally, we explore the impact
of the digital economy on the transition to low-carbon energy, with a focus on its moderating
effects. Moreover, we assess how the impact of green finance on low-carbon energy transi-
tion varies across different income groups and employ panel quantile regressions to explore
potential nonlinear effects.
This paper contributes twofold to the existing literature. Firstly, it underscores the effec-
tiveness of green financing in tackling the financing challenges linked with the low-carbon
energy transition in developing nations. Specifically, our study reveals that green financing
yields favorable outcomes primarily in the wind and hydro energy sectors. This insight
offers valuable guidance for policymakers and financial institutions to reshape the financial
landscape and enhance the efficiency of green financing. Secondly, our study confirms the
beneficial moderating effect of digital economy on this relationship and discerns and com-
pares variations across energy types. This insight highlights the significance of the digital
economy in enhancing the efficiency of green financing. Our findings offer crucial implica-
tions for advancing the low-carbon energy transition, particularly through the perspective
of digital economy.
The remainder of this work is as follows. Section 2 reviews relevant literature and
highlights the gaps. Section 3 describes the methodology and data. Section 4 presents the
empirical findings. Section 5 explores the moderation effects of digital economy. Section 6
presents the main findings and insights for policy implementation.

2 Literature Review

2.1 The Nexus Between Green Financing and Low-carbon Energy Transition

Green finance has increasingly garnered widespread attention as a key mechanism for pro-
moting low-carbon development (Du et al. 2023; Ren et al. 2023; Zhang et al. 2022a; Zhao
et al. 2023b). Belgacem et al. (2023) evaluate the effectiveness of green bond financing in
fostering environmental investment in emerging Asian countries. Their findings suggest that
green bonds positively influence long-term investments and loans for renewable energy,
thereby facilitating the transition to low-carbon energy sources. Both the public and private
sectors play crucial roles in the investment process. Polzin et al. (2021) argue that both

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governments and private investors must continue their investments to achieve a transition
to carbon-emission-free power systems. Aleluia et al. (2022) emphasize the importance of
government and public policies in accelerating the sustainable energy transition in South-
east Asia, particularly in deploying financeable clean energy projects.
Developments in the financial sector have facilitated the financing of cleaner projects.
Kim and Park (2016) demonstrate that the renewable energy industry, which relies heavily
on external financing, is experiencing a positive growth trajectory within the broader con-
text of financial development. Well-established financial markets can accelerate the growth
of renewable energy industry, particularly when utilizing debt and equity financing (Kim
and Park 2016). Brunnschweiler (2010) discovers that robust capital markets can effectively
channel private investment into the renewable energy industry, while ineffective financial
markets yield the opposite outcome. Hall et al. (2017) observe that leveraging financial
markets as an adaptation mechanism can broaden the impact of low-carbon investment poli-
cies. Financial institutions have a responsibility to optimize the capital allocation to enhance
social benefits and mitigate environmental damage (Lioui and Sharma 2012).
Green financing frequently faces uncertainty. Caporale et al. (2023) argue that small and
medium-sized firms in Europe tend to be influenced by different sources of funding, which
in turn affects their willingness to conserve energy. The finding demonstrates that internal
financing consistently positively influences enterprises’ inclination to take up energy-saving
methods. Zhang et al. (2022a) examine how energy financing affects energy transformation
amid the COVID-19 pandemic, and take green bond financing as an intervention measure.
They find that in E-7 economies, energy financing heavily depends on green bonds, empha-
sizing the key role of green bonds in energy transformation. Polzin and Sanders (2020)
evaluate the financing sources for clean energy in Europe and reveal that current financing
sources can provide 2–6 times the required funding. Nevertheless, the anticipated disrup-
tions in policies have resulted in reluctance among institutional investors and borrowers,
particularly pension funds and financial institutions, to allocate funding towards renewable
energy or grid infrastructure.
Building on the preceding analysis, we propose the initial research hypothesis:

H1 Green financing facilitates the transition to low-carbon energy.

2.2 The Influence of Digital Economy on the Nexus Between Green Financing and
Low-Carbon Energy Transition

The digital economy, as an emerging resource, is increasingly serving as a crucial cata-

lyst for future progress (Huo et al. 2022). The Internet has contributed to the advancement
of green finance by offering novel technology advancements and enhancing relationships
among market participants (Huo et al. 2022; Kumar et al. 2022). Digitization’s fast, open,
and porous nature can assist financial markets in allocating resources more rationally (Bris
et al. 2017). The Internet plays a crucial role in the financial sector due to its utilization in
digital payment and trading systems, including big data technologies and E-commerce (Lin
et al. 2015). According to Cheng et al. (2018), the Internet, particularly online financial
trading platforms, significantly influences the functioning of the stock market. The digital

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economy combined with finance can incentivize environmental technology by facilitating

information accessibility (Yu et al. 2020).
The literature has extensively examined the influence of digital economy on transition to
the low-carbon system. Zhang et al. (2022b) employ provincial panel data spanning from
2007 to 2019 to assess China’s digital economy system. Their findings indicate that the
digital economy is emerging as a significant catalyst for low-carbon development. Tao et al.
(2022) highlight that Fintech has a beneficial effect on promoting the economic transforma-
tion of carbon regulation and greenhouse control. Hwang (2023) posits that digital economy
is a key instrument for expediting and expeditiously attaining a low-carbon economic tran-
sition. This transformation is vital to avert disastrous repercussions and guarantee environ-
mental sustainability. In this context, the participation and technological upgrading of the
green financial system are crucial for strengthening energy control (Huo et al. 2022). This
means that digital economy’s advancement enables green financial system to effectively
assist the technological enhancement of low-carbon transformation.
Hence, we present our second hypothesis.

H2 The digital economy helps to drive the low-carbon energy transition and effectively
enhances the role of green financing in this process.

2.3 Research Gaps

Our comprehensive literature analysis reveals several critical research gaps requiring imme-
diate attention. Firstly, existing research inadequately explores the impact of global green
financing on the low-carbon energy transition in developing countries. It is crucial to inves-
tigate the influence of international green financing on the transition to renewable energy
and to compare its effects across different energy types. Additionally, although previous
literature has explored the potential impacts of digital economy on the transition to low-
carbon systems, there is a notable absence of research specifically investigating the role of
digital economy in the connection between green financing and energy transition. Research
in this area helps to uncover the advantages of leveraging digital economy to facilitate the
financing of clean energy projects, thus expediting the transition to low-carbon energy.

3 Model Construction and Data Sources

3.1 Econometric Model

3.1.1 Modeling the Effect of Green Financing on Low-carbon Energy Transition

To examine the role of green financing in facilitating the low-carbon transition of energy
sector in developing countries, we construct an econometric model. We also incorporate
controls for various economic and social factors affecting the low-carbon energy transi-
tion to address concerns related to endogeneity stemming from omitted variable bias. We
employ an econometric theoretical model to assess the influence of green financing on the
low-carbon energy transition, as illustrated in Eq. (1).

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Green Financing, Energy Transformation, and the Moderating Effect of…

rci,t = α + β ∗ gfi,t + γj ∗ Xj,i,t + νi + µt + εi,t (1)

In the model, rc refers to renewable energy consumption (TWh), which includes biomass
energy (denoted as bc ), hydro energy ( hc ), solar energy ( sc ), and wind energy ( wc ). It
serves as a proxy variable for the low-carbon energy transition. gf refers to the flow of
clean energy financing obtained by developing countries (million USD) and represents the
level of green financing. Xj stands for control factors including economic development
(measured by per capita gross domestic product (GDP) (USD), denoted as eco ), industrial-
ization process (measured by the proportion of industrial added value to GDP (%), denoted
as ind ), urbanization rate (measured by the proportion of urban population to total popula-
tion (%), denoted as urb ), foreign direct investment (measured by the proportion of foreign
direct investment to GDP (%), denoted as f di ), population density (measured by the num-
ber of people per square kilometer (people/sq km), denoted as pop ), coal rent (measured by
the proportion of coal rent to GDP (%), denoted as coal ), and readiness for climate change
adaptation (measured by the climate change adaptation readiness index, denoted as read ).
Subscripts i and t denote country and year, respectively. Coefficients α , β , γ j represent
variable coefficients, while ν i and µ t signify individual and year fixed effects, and εi,t
refers to the random disturbance term. We focus on the coefficient of independent variable
β . A significant and positive coefficient ( β ) indicates that green financing promotes the
transition to low-carbon energy, thus validating hypothesis H1.

3.1.2 Modeling the Moderating Effect of Digital Economy

Another objective is to examine the moderating effect of digital economy on the correlation
between green financing and low-carbon energy transition. To accomplish this, we integrate
digital economy and the interaction term between digital economy and green financing into
the model outlined in Eq. (1), as depicted in Eq. (2).

rci,t = δ + θ ∗ gfi,t + κj ∗ Xj,i,t + η ∗ dei,t + ω ∗ dei,t ∗ gfi,t + νi + µt + εi,t (2)

In this equation, de represents the level of the digital economy in each country, measured
using the digital economy index obtained through the method of fully-aligned polygonal
graphical indexing. δ , θ , κ j , η , and ω represent the coefficients to be estimated. The
meanings of the remaining symbols remain consistent with Eq. (1). Of particular inter-
est is the coefficient ω , which corresponds to the interaction term between de and gf . A
significant ω suggests the presence of a moderating effect of digital economy. If both ω
and θ exhibit a positive sign, it indicates that the digital economy amplifies the beneficial
impact of green financing on the low-carbon energy transition, thereby validating H2. The
coefficient η represents the direct influence of digital economy on the low-carbon energy
transition.

3.2 Data

We utilize an unbalanced panel dataset comprising 32 developing countries globally, span-

ning the period from 2003 to 2020. The data is sourced from authoritative institutions such
as British Petroleum (BP), the Organization for Economic Co-operation and Development

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(OECD), the International Renewable Energy Agency (IRENA), the World Bank, and the
International Telecommunication Union. Samples with severe missing data are excluded
from the analysis. To ensure data integrity, linear interpolation is employed to fill in miss-
ing values for select variables related to renewable energy consumption. For instance, fol-
lowing interpolation, the observations for sc increase from 559 to 568, while bc fills in
24 missing values. Additionally, to mitigate price volatility disruptions, all price data are
converted to 2015 constant prices using the deflator. Consequently, the dataset comprises
568 observations.

3.2.1 Low-carbon Energy Transition data

We employ statistical data on renewable energy consumption (including biomass, hydro,

solar, and wind energy) from the BP Statistical Review of World Energy1, as well as sta-
tistical data on renewable energy electricity consumption (including biomass, hydro, solar,
and wind electricity) from both the BP Statistical Review of World Energy and the Ember
Global and European Electricity Review2, as alternative variables for the dependent vari-
able to directly measure the low-carbon energy transition. These indicators effectively cap-
ture the commitment of developing countries to adopt renewable energy, reflecting their
pace and advancement in transitioning from high-carbon to renewable (low-carbon) energy
sources, a common approach in existing literature (Li et al. 2023; Zeng et al. 2024).

3.2.2 Green Financing data

SDG 7a emphasizes the need for enhanced international collaboration to bolster investment
in energy infrastructure and clean energy technologies (United Nations 2017). This metric,
aligned with goal 7a, quantifies international financial inflows directed towards developing
nations to foster clean energy R&D and promote renewable energy generation, including
hybrid systems. The dataset, jointly curated by the OECD3 and the IRENA4, encompasses
official loans, grants, and equity investments for clean energy R&D and renewable energy
production from foreign governments, multilateral agencies, and other development finance
institutions, encompassing both official and private flows. Data is organized by country at
the project level and meticulously scrutinized for accuracy. However, it currently does not
comprehensively capture all financial flows, with investments in off-grid electricity supply
and improved cookstove projects only partially accounted for. Nonetheless, this indicator
stands as a robust measure for assessing the progression of international green financing. The
global advancement of green financing is visually depicted in Fig. 1. Notably, developing
countries have witnessed a substantial uptick in access to international clean energy finance,
particularly evident in select nations and regions across South Asia and South America.

1
See https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html.
2
See https://ember-climate.org/insights/.
3
See https://data.oecd.org.
4
See https://www.irena.org/Data.

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3.2.3 Socio-economic data

To ensure precise estimates of the impact of green financing, we extensively account for
the influence of other economic and social factors on the low-carbon energy transition.
Economic growth in a country influences investors’ expectations regarding the returns from
clean energy projects, typically facilitating the financing of such projects (Taghizadeh-Hes-
ary and Rasoulinezhad 2020), thereby attracting additional capital for the low-carbon transi-
tion. Economic growth is quantified using GDP per capita.
Shahbaz et al. (2022) argue that transforming and upgrading the industrial structure can
diminish reliance on fossil fuels, thereby facilitating the low-carbon transition. We incor-
porate the industrialization process as a control variable and measure it using the ratio of
industrial value added to GDP.
The level of foreign direct investment (FDI) is measured as the ratio of net FDI inflows
to GDP. FDI plays a crucial role in enhancing the efficiency of renewable energy production
through technology transfer to the economy (Paramati et al. 2017). Their study highlights
the significant impact of FDI on the adoption of sustainable energy practices.
Population density refers to the number of people per unit area, measured in square kilo-
meters. It serves as a key determinant of energy consumption patterns, exhibiting a robust
correlation with both overall energy usage and renewable energy consumption. Numer-
ous studies have demonstrated that higher population density tends to correlate with lower
energy consumption (Kamal-Chaoui and Robert 2009).
The urbanization rate is determined by the proportion of urban population to total popula-
tion. Research conducted by Yin and Qamruzzaman (2024) confirms a correlation between
urban sprawl and increased energy demand, with a noted trend towards renewable energy
adoption to address this demand.
Rental fees are significant in energy extraction processes. Increased conventional energy
rents often incentivize mineral firms to intensify fossil fuel extraction (Asongu et al. 2020;
Wang et al. 2020), potentially hindering the transition to renewable energy. Hence, coal rent
is incorporated into the model as a control variable, quantified by its share in GDP.
Governmental renewable energy strategies may be influenced by existing policies and
climate initiatives. Considering the challenge of integrating varied energy and climate poli-
cies from developing countries into the model, we opt to control for climate change adap-
tation readiness as an indicator of policy effectiveness or response, aiming to capture the
broader impact of policy initiatives across nations. Sarkodie et al. (2023) underscore the
significance of climate change adaptation readiness in steering the transition towards renew-
able energy sources.
Raw data for the above control variables are available from the World Bank database5.

3.2.4 Digital Economy data

To assess the scope of digital economy, we utilize the indicator framework developed by
Shahbaz et al. (2022), which comprises four dimensions: digital infrastructure, digital social
impact, digital trade, and digital social support, encompassing a total of 11 sub-indicators
(refer to Fig. 2). Subsequently, we compute the digital economy index utilizing a fully-
aligned polygonal graphical indexing method, which leverages expert assessment to effec-
5
See https://databank.worldbank.org/reports.aspx?source=World-Development-Indicators.

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 R. Nepal et al.

Fig. 2 System of indicators for calculating the digital economy index

tively mitigate subjective random errors (Hao et al. 2020; Wu et al. 2005). The data utilized
in this analysis is sourced from databases including the World Bank6, the International Tele-
communication Union7, and the UN E-Government Knowledgebase8.
Definitions and descriptive statistics for the variables used in the study are outlined in
Table 1. Before conducting empirical analysis, we test for multicollinearity in the model, as
shown in Table A1. The general rule of thumb is that if the variance inflation factor (VIF)
is less than 10, the model is not considered to have serious multicollinearity issues. The
results indicate that there is no serious multicollinearity concern among the variables used
in this study.

6
See https://databank.worldbank.org/reports.aspx?source=World-Development-Indicators.
7
See https://www.itu.int/en/Pages/default.aspx.
8
See https://publicadministration.un.org/egovkb.

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Table 1 Definitions and descriptive statistics of the selected variables

Variable Definition Mean Std. Min Max Data
Dev. source
rc Renewable energy consumption (TWh) 195.2 612.7 0.009 5,838 BP
bc Biomass energy consumption (TWh) 14.92 41.17 0 264.5 BP
hc Hydro energy consumption (TWh) 148.9 444.7 0 3,471 BP
sc Solar energy consumption (TWh) 6.462 46.82 0 685.7 BP
wc Wind energy consumption (TWh) 17.89 98.20 0 1,225 BP
re Renewable power consumption (TWh) 68.29 221.1 0 2,185 BP
be Biomass power consumption (TWh) 3.977 12.51 0 135.6 BP
he Hydro power consumption (TWh) 54.45 164.5 0 1,322 BP
se Solar power consumption (TWh) 2.391 17.61 0 261.1 BP
we Wind power consumption (TWh) 6.682 37.03 0 466.5 BP
gf Green finance received by developing coun- 128.6 284.2 0 2,640 OECD;
tries for clean energy (million USD) IRENA
gfp Green finance as a percentage of GDP (‰) 0.509 1.761 0 33.04 Calculation
de Digital economy index 0.389 0.244 0.0107 1.114 Calculation
eco GDP per capita (USD) 5,441 3,537 698.7 18,651 WDI
fdi Foreign direct investment as a percentage of 3.050 4.348 − 7.021 55.07 WDI
GDP (%)
pop Population density (people/sq km) 144.6 214.0 5.522 1,286 WDI
urb Urbanization rate (%) 58.88 18.05 18.20 92.11 WDI
ind Industrial value added as a percentage of 33.97 10.29 17.98 70.84 WDI
GDP (%)
coal Coal rent as a percentage of GDP (%) 0.367 0.800 0 7.248 WDI
read Climate change adaptation readiness index 0.379 0.0744 0.206 0.579 ND-GAIN
The table provides detailed information on the variables used in the study, including their definitions,
units, mean values, standard deviations, minimum and maximum values, and the sources of data. The
digital economy index is derived using a fully-aligned polygonal graphical indexing method. Std. Dev.
refers to standard deviation

3.3 Estimation Strategy

We utilize a range of estimation techniques to accurately assess the relationship between

green financing, the digital economy, and the low-carbon energy transition. Initially, we
establish the preliminary link between green financing and the low-carbon energy tran-
sition through Ordinary Least Squares (OLS) estimation, which assumes that all sample
observations are generated by the same process. Subsequently, we employ Random Effects
(RE) and Fixed Effects (FE) models to further investigate, accounting for individual effects.
These models differ in their treatment of individual effects: the RE model assumes these
effects are uncorrelated with the explanatory variables, whereas the FE model considers
them to be correlated with the randomized disturbance term, assigning each individual
a non-randomized intercept term. The Hausman test aids in determining the correlation
between individual effects and explanatory variables, thus guiding the estimation strategy.
Addressing endogeneity is crucial for obtaining reliable estimates of models (1) and (2).
Sources of endogeneity in this study may include omitted variables and bidirectional causal-
ity. To mitigate endogeneity resulting from omitted variables, we control for economic and
social factors that may influence the low-carbon energy transition, encompassing various
dimensions such as economic trade, population, urbanisation, industrialisation, fossil fuels,

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and climate policy. Additionally, the two-way fixed effects model specification helps us
eliminate the potential impact of “time-invariant individual characteristics” and “individual-
invariant time characteristics” on model estimation, thereby reducing endogeneity issues
caused by omitted variables.
Moreover, the adoption of renewable energy is likely to influence investment decisions
positively. Zhong et al. (2024) demonstrate that increased renewable electricity output stim-
ulates investment in renewable energy, indicating its impact on domestic investors’ choices.
Likewise, international investors may prefer countries showcasing potential or commitment
to renewable energy adoption, driven by factors like risk reduction, enhanced reporting
opportunities, and alignment with sustainability objectives. However, this situation raises
concerns regarding endogeneity resulting from bidirectional causality. To further address
this issue, employing suitable instrumental variables becomes imperative. We employ a cre-
ative approach, using the square of the mean level of green financing in all other countries
during the same year (denoted as mean_gf 2) as an instrument, and employ two-stage least
squares (2SLS) estimation.
The construction of this instrument was inspired by previous studies (Chen et al. 2024;
Liu et al. 2024; Xiang et al. 2023; Yu et al. 2020; Zhao et al. 2023a). Using the square term
helps capture the nonlinear effects in the distribution of international clean energy funds,
i.e., the marginal effect of changes in the green financing levels of other countries on the
support received by the home country. For instance, when other countries receive a small
amount of green financing, changes in their levels may have a minor impact on the home
country’s support; however, when other countries receive significant financing, changes in
their levels may have a substantial impact on the home country.
First, this instrument ensures correlation with the endogenous explanatory variable,
which may arise from potential competition effects or spillover effects. The competition
effect implies that developing countries may compete for green financing during the same
period (Dreher et al. 2021). The spillover effect implies that when the global total amount of
green financing increases, all countries may benefit, leading to an increase in the financing
received by each country.
Second, considering that the green financing levels in other countries typically do not
directly affect the home country’s low-carbon transition process, there are compelling rea-
sons to regard the instrument as exogenous. Green financing decisions are primarily driven
by factors such as project costs, environmental benefits, and inherent characteristics of the
beneficiary country (including resource endowment, governance level, and financial devel-
opment) rather than the low-carbon energy transition process in other countries (Benavides-
Franco et al. 2023).
Moreover, the monotonicity assumption of the instrumental variable emphasizes that the
direction of the instrument’s effect is consistent across all individuals (Angrist and Pischke
2009). We plot the relationship between the endogenous explanatory variable gf and the
instrument mean_gf 2 by region and income, as shown in Fig. 3. It can be observed that
the slopes of the fitted lines between gf and mean_gf 2 are positive in all groups. This
indicates that the instrument’s effect on green financing is consistent across all countries,
supporting the monotonicity assumption of the instrument. However, the varying response
intensities (different slopes in different groups) reveal heterogeneous effects of the instru-
ment. Furthermore, this positive correlation may suggest that the spillover effect plays a
more significant role compared to the competition effect.

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Green Financing, Energy Transformation, and the Moderating Effect of…

Fig. 3 Relationship between gf and mean_gf2, by region and income group

In this study, instrumental variable (IV) regression using two-stage least squares, while
controlling for year and country-specific effects, serves as the primary estimation approach.
The subsequent statistical tables present the Kleibergen-Paap rk Wald F-statistic to assess
instrumental correlations and the Kleibergen-Paap rk LM statistic to ensure instrument iden-
tifiability. A p-value of less than 0.01 for the Kleibergen-Paap rk LM statistic indicates that
the null hypothesis of “instruments are unidentified” is rejected at the 1% significance level.
If the Kleibergen-Paap rk Wald F statistic exceeds the critical values provided by Stock and
Yogo (2005), it suggests that the instruments are correlated with the endogenous explana-
tory variables and are not weak instruments. We present the estimation strategy of this study
in Fig. 4.

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 R. Nepal et al.

Fig. 4 Estimation strategy for this research

4 Effect of Green Financing on the Low-carbon Energy Transition

4.1 Benchmark Results

4.1.1 FE Estimates

Based on OLS, RE, and FE estimations, OLS confirms the progressive impact of green
financing on the low-carbon energy transition. The Hausman test results validate significant
correlations between individual effects and explanatory variables (Prob > chi2 = 0.0000).
Consequently, to ensure a consistent estimator, we choose the FE model over the RE model.
Table A2 presents both OLS and RE estimation outcomes, while Table 2 displays FE esti-
mates, including the influence of green financing on renewable energy consumption and
various sources (biomass, hydro, solar, and wind energy). Year and country are simultane-
ously fixed to control for constant year effects and individual characteristics. FE model
results demonstrate a statistically significant and positive relationship between green financ-
ing and renewable energy consumption, with a coefficient of 0.07 for gf . Furthermore,
the coefficient of green financing is significantly positive solely in the wind energy model,
indicating its effectiveness in promoting renewable energy consumption and facilitating the
low-carbon energy transition in developing countries, particularly in advancing wind energy
usage. This preliminary finding supports hypothesis H1.

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Green Financing, Energy Transformation, and the Moderating Effect of…

Table 2 Effects of green financing on low-carbon energy transition, FE estimates

Dependent variable: rc bc hc sc wc
Variables (1) (2) (3) (4) (5)
gf 0.070* 0.005 0.030 0.008 0.020*
(0.040) (0.004) (0.022) (0.006) (0.011)
eco 0.167*** − 0.001 0.089*** 0.022*** 0.042***
(0.016) (0.002) (0.009) (0.002) (0.004)
urb 68.48*** 0.678 39.65*** 7.012*** 15.60***
(5.978) (0.666) (3.348) (0.955) (1.598)
ind − 6.367** − 0.778 − 3.284** − 0.958** − 1.543**
(2.621) (0.519) (1.468) (0.418) (0.701)
pop − 0.297 − 0.301*** 0.009 0.049 − 0.118
(0.730) (0.098) (0.409) (0.116) (0.195)
fdi 4.948* 1.885*** 2.213 0.637 1.240*
(2.796) (0.719) (1.566) (0.446) (0.748)
coal − 100.1*** 2.197 − 50.80*** − 15.11*** −
28.15***
(22.19) (1.887) (12.43) (3.546) (5.932)
read − 344.0 − 89.44*** 34.95 − 76.39* − 167.1**
(258.7) (24.52) (144.9) (41.16) (69.18)
Constant − 4,004*** 49.90 − 2,374*** − 424.2*** −
907.8***
(351.8) (45.89) (197.1) (55.93) (94.07)
Year fixed Yes Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes Yes
Obs. 568 303 568 559 568
Number of countries 32 18 32 32 32
R-squared 0.495 0.285 0.480 0.379 0.452
This table presents the estimates of green financing’s impact on the consumption of renewable energy and
different energy types, as shown in columns (1) through (5), respectively. Specifically, the variables, rc, bc,
hc, sc and wc refer to the consumption of renewable energy (TWh), biomass energy (TWh), hydro energy
(TWh), solar energy (TWh), and wind energy (TWh), respectively. In all models, year and individual
(country) effects are fixed to control for the effects of confounding factors. ***, **, and * refer to statistical
significance at the 1%, 5%, and 10% levels, respectively

4.1.2 IV Estimates

Considering the previously mentioned endogeneity concerns, we conduct IV estimation

using 2SLS, employing the squared mean value of access to green finance for other coun-
tries in the same year (mean_gf 2) as the instrument. The results are presented in Table 3.
We observe a coefficient of 0.088 for green finance ( gf ), slightly larger than the previ-
ously estimated 0.07, suggesting that each additional million dollars of green finance could
result in an average increase of 88 GWh in renewable energy consumption in develop-
ing countries. Considering China, the largest energy producer and consumer, and based on
the historical growth rate (9.83%), we anticipate China to receive $164.2 million in green
financing by 2025. This funding is anticipated to drive 14.45 TWh of renewable energy con-
sumption in China, constituting 4.4‰ of China’s 2025 renewable energy generation target9

9
According to the 14th Five-Year Plan for Renewable Energy Development, China’s annual renewable
energy generation is expected to reach about 3.3 trillion kWh in 2025.

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Table 3 Effects of green financing on low-carbon energy transition, IV estimates

Dependent variable: rc bc hc sc wc
Variables (1) (2) (3) (4) (5)
gf 0.088** 0.004 0.045* 0.007 0.024**
(0.043) (0.004) (0.024) (0.007) (0.012)
eco 0.167*** − 0.001 0.089*** 0.022*** 0.042***
(0.016) (0.002) (0.009) (0.002) (0.004)
urb 68.45*** 0.690 39.63*** 7.014*** 15.59***
(5.979) (0.667) (3.350) (0.955) (1.599)
ind − 6.392** − 0.768 − 3.305** − 0.957** − 1.548**
(2.622) (0.520) (1.469) (0.418) (0.701)
pop − 0.304 − 0.298*** 0.003 0.050 − 0.119
(0.731) (0.098) (0.409) (0.116) (0.195)
fdi 4.876* 1.874*** 2.153 0.640 1.225
(2.797) (0.719) (1.567) (0.446) (0.748)
coal − 100.0*** 2.179 − 50.71*** − 15.12*** −
28.13***
(22.19) (1.888) (12.43) (3.546) (5.933)
read − 326.5 − 90.79*** 49.60 − 77.25* − 163.4**
(259.3) (24.64) (145.3) (41.25) (69.34)
Constant − 4,609*** − 4.011 − 2,735*** − 457.2*** −
1,027***
(423.2) (53.08) (237.1) (67.52) (113.1)
Year Fixed Yes Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes Yes
Obs. 568 303 568 559 568
Number of countries 32 18 32 32 32
R-squared 0.895 0.896 0.937 0.545 0.707
KP rk LM 478.9 250.1 478.9 471.3 478.9
P-value of KP rk LM 0 0 0 0 0
KP rk Wald F 2745 1229 2745 2697 2745
Stock-Yogo 16.38 16.38 16.38 16.38 16.38
This table presents the estimates of green financing’s impact on the consumption of renewable energy and
different energy types, as shown in columns (1) through (5), respectively. Specifically, the variables, re, be,
he, se and we refer to the consumption of renewable energy (TWh), biomass energy (TWh), hydro energy
(TWh), solar energy (TWh), and wind energy (TWh), respectively. In all models, year and individual
(country) effects are fixed to control for the effects of confounding factors. Kleibergen-Paap rk LM statistic
is used to test whether the instrumental variable can be identified. Kleibergen-Paap rk Wald F-statistic is
used to test whether the instrumental variable is a weak instrument. The Stock-Yogo statistic refers to the
critical value at the 10% level provided by Stock and Yogo (2005) for identifying weakly instrumented
variables. ***, **, and * refer to statistical significance at the 1%, 5%, and 10% levels, respectively

(3.5‰ with fixed effects). Despite appearing modest, this impact holds significance. Align-
ing with China’s 14th Five-Year Plan for Renewable Energy Development, green financing
initiatives aim to foster international technological innovation and cooperation in renew-
able energy, standardized systems, as well as cooperation and exchange platforms, foster-
ing long-term low-carbon transition development. Our study reinforces the positive impact
of international green financing in promoting low-carbon energy transition in developing
countries, affirming hypothesis H1. However, it is crucial to acknowledge the significant

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variation in green financing across beneficiary countries and the susceptibility of future
flows to various external uncertainties.
Additionally, the IV estimation results demonstrate that green financing effectively
directs investments towards hydro (0.045) and wind (0.024) energy consumption. Similar
findings are supported by a study focused on the Chinese context (Liu et al. 2023b). Green
financing plays a direct role in providing financial support for renewable energy projects,
thereby facilitating the implementation of government-led renewable energy development
initiatives (Liu et al. 2023b). The positive impact observed in hydro energy consumption
may be attributed to its inherent flexibility, storage advantages, and economies of scale (Liu
and He 2023). Wind energy, characterized by its capital-intensive nature (Best 2017), tends
to attract significant support. By reducing reliance on fossil fuels, wind energy contributes to
improved air quality and climate mitigation efforts (Millstein et al. 2017). Notably, between
2007 and 2015, wind power generation in the United States led to a 26% reduction in sulfur
dioxide ( SO 2 ) and a 17% reduction in nitrogen oxides ( NO x ), resulting in approximately
$54 billion in air quality and public health benefits (Millstein et al. 2017).

4.2 Robustness Tests

To verify the accuracy of the previous estimation results, we conduct robustness tests
employing two alternative strategies: replacing the measurement approaches for both low-
carbon energy transition and green financing.

4.2.1 Evaluating Low-carbon Energy Transition via Renewable Electricity use

The electricity sector typically represents the majority of energy demand and serves as
the cornerstone for advancing the energy transition (Bogdanov et al. 2021). Therefore, we
opt to gauge the low-carbon energy transition using renewable electricity consumption,
encompassing electricity consumption from various energy sources, similar to Liu et al.
(2023a). We utilize IV estimation with fixed year and individual effects, and the outcomes
are displayed in Table 4. The findings indicate that green financing fosters the expansion of
renewable electricity (with a coefficient of 0.033 and significance at the 5% level), and this
favorable impact extends to hydropower, wind, and biomass generation. Specifically, an
additional $1 million in green financing results in a 33 GWh increase in renewable electric-
ity. This discovery suggests that the influx of green finance can propel the energy transition
in the power sector, affirming the resilience of the benchmark regression results.

4.2.2 Evaluating Green Financing via its GDP Share

In another robustness test, we assess the effect of financing by examining the share of green
financing relative to GDP. This metric elucidates the significance of green financing within
a country’s economic framework. Employing the same estimation approach as the previous
robustness test, the findings are presented in Table 5. The results indicate that an uptick
in the share of green financing (as a percentage of GDP) effectively stimulates the expan-
sion of renewable energy consumption, with a complementary increase observed in hydro
and wind energy consumption. Specifically, hydro and wind energy are projected to con-
tribute approximately half and a quarter, respectively, to the overall growth in renewable

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Table 4 Robustness checks: effects of green financing on low-carbon energy transition (measured by renew-
able electricity consumption), IV estimates
Dependent variable: re be he se we
Variables (1) (2) (3) (4) (5)
gf 0.033** 0.003** 0.018* 0.003 0.009**
(0.016) (0.001) (0.009) (0.003) (0.004)
eco 0.063*** 0.004*** 0.035*** 0.008*** 0.016***
(0.006) (0.000) (0.003) (0.001) (0.002)
urb 25.63*** 1.574*** 15.36*** 2.660*** 5.882***
(2.276) (0.186) (1.309) (0.358) (0.608)
ind − 2.442** − 0.201** − 1.321** − 0.364** − 0.592**
(0.998) (0.080) (0.574) (0.157) (0.266)
pop − 0.063 − 0.017 − 0.024 0.023 − 0.043
(0.278) (0.022) (0.160) (0.044) (0.074)
fdi 1.794* 0.191** 0.911 0.236 0.466
(1.065) (0.085) (0.612) (0.168) (0.284)
coal − 38.73*** − 2.159*** − 20.22*** − 5.725*** −
10.66***
(8.449) (0.671) (4.858) (1.330) (2.255)
read − 110.1 − 20.96*** 1.551 − 27.92* − 62.57**
(98.73) (7.832) (56.77) (15.548) (26.36)
Constant − 1,729*** − 101.2*** − 1,056*** − 173.5*** −
387.0***
(161.1) (13.12) (92.64) (25.37) (43.01)
Year fixed Yes Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes Yes
Obs. 568 550 568 568 568
Number of countries 32 31 32 32 32
R-squared 0.883 0.772 0.930 0.541 0.702
KP rk LM 478.9 460.2 478.9 478.9 478.9
P-value of KP rk LM 0 0 0 0 0
KP rk Wald F 2745 2532 2745 2745 2745
Stock-Yogo 16.38 16.38 16.38 16.38 16.38
This table presents the estimates of green financing’s impact on the consumption of renewable electricity
and different types of electricity, as shown in columns (1) through (5), respectively. Specifically, the
variables, re, be, he, se and we refer to the consumption of renewable electricity (TWh), biomass electricity
(TWh), hydro electricity (TWh), solar electricity (TWh), and wind electricity (TWh), respectively. In all
models, year and individual (country) effects are fixed to control for the effects of confounding factors.
Kleibergen-Paap rk LM statistic is used to test whether the instrumental variable can be identified.
Kleibergen-Paap rk Wald F-statistic is used to test whether the instrumental variable is a weak instrument.
The Stock-Yogo statistic refers to the critical value at the 10% level provided by Stock and Yogo (2005) for
identifying weakly instrumented variables. ***, **, and * refer to statistical significance at the 1%, 5%,
and 10% levels, respectively.

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Green Financing, Energy Transformation, and the Moderating Effect of…

Table 5 Robustness checks: effects of green financing (as a proportion of GDP) on low-carbon energy transi-
tion, IV estimates
Dependent variable: rc bc hc sc wc
Variables (1) (2) (3) (4) (5)
gfp 20.57** 0.819 10.52* 1.594 5.524**
(10.28) (0.930) (5.747) (1.616) (2.747)
eco 0.168*** − 0.001 0.090*** 0.022*** 0.042***
(0.016) (0.002) (0.009) (0.003) (0.004)
urb 68.97*** 0.743 39.89*** 7.051*** 15.73***
(6.077) (0.671) (3.396) (0.959) (1.623)
ind − 6.569** − 0.725 − 3.395** − 0.971** − 1.595**
(2.667) (0.523) (1.491) (0.420) (0.712)
pop − 0.235 − 0.280*** 0.038 0.055 − 0.100
(0.742) (0.098) (0.415) (0.117) (0.198)
fdi 5.127* 1.877** 2.281 0.660 1.292*
(2.837) (0.726) (1.586) (0.447) (0.758)
coal − 98.70*** 2.351 − 50.04*** − 15.01*** −
27.78***
(22.56) (1.922) (12.61) (3.561) (6.027)
read − 383.3 − 94.24*** 20.53 − 81.63** − 178.6**
(260.3) (24.26) (145.5) (40.89) (69.53)
Constant − 4,623*** − 8.224 − 2,743*** − 458.1*** −
1,030***
(430.0) (53.43) (240.3) (67.75) (114.9)
Year fixed Yes Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes Yes
Obs. 568 303 568 559 568
Number of countries 32 18 32 32 32
R-squared 0.891 0.895 0.935 0.542 0.698
KP rk LM 174.9 76.78 174.9 172 174.9
P-value of KP rk LM 0 0 0 0 0
KP rk Wald F 227.3 88.25 227.3 223.2 227.3
Stock-Yogo 16.38 16.38 16.38 16.38 16.38
This table presents the estimates of the impact of green financing (as a share of GDP) on the consumption
of renewable energy and different energy types, as shown in columns (1) through (5), respectively.
Specifically, the variables, rc, bc, hc, sc and wc refer to the consumption of renewable energy (TWh),
biomass energy (TWh), hydro energy (TWh), solar energy (TWh), and wind energy (TWh), respectively.
In all models, year and individual (country) effects are fixed to control for the effects of confounding
factors. Kleibergen-Paap rk LM statistic is used to test whether the instrumental variable can be identified.
Kleibergen-Paap rk Wald F-statistic is used to test whether the instrumental variable is a weak instrument.
The Stock-Yogo statistic refers to the critical value at the 10% level provided by Stock and Yogo (2005) for
identifying weakly instrumented variables. ***, **, and * refer to statistical significance at the 1%, 5%,
and 10% levels, respectively

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 R. Nepal et al.

energy consumption, mirroring the outcomes of the benchmark regression. Consequently,

an escalation in the share of green financing plays a pivotal role in advancing the low-carbon
energy transition, thereby reaffirming the robustness of the benchmark results.

4.3 Heterogeneity Tests

4.3.1 Income Heterogeneity

We conduct a comparative analysis to ascertain potential disparities in the influence of green

financing across countries with varying income levels. The sample is categorized based
on the World Bank’s income classification, with countries having a GNI per capita of less
than $4,465, as per the World Bank Atlas method, designated as low-income samples, and
vice versa for high-income samples. The IV estimation results reveal a significant posi-
tive coefficient of green financing in low-income samples, whereas it is not significant in
high-income samples (see Table 6). This suggests that green financing is more impactful in
facilitating the low-carbon energy transition in low-income economies compared to their
high-income counterparts. The underlying reason may lie in the ability of green finance
inflows to address the financial deficit in low-income countries and regions, thereby exert-
ing a substantial influence on transitioning to low-carbon energy systems. A staggering fact
is that approximately 97% of sustainable fund assets are concentrated in developed regions
(UNCTAD 2021). In contrast, higher-income economies primarily encounter constraints
related to advanced knowledge and technological limitations. This discovery underscores
the divergence in policy preferences among countries of varying income levels and under-
scores the importance of international cooperation in bolstering collaborative initiatives
with low-income countries and offering technical support to bridge the transition gap.

4.3.2 Asymmetry

In addition, the impact of green finance on the low-carbon transition may exhibit nonlinear-
ity, particularly due to variations in renewable energy transition progress among sample
countries. To examine potential nonlinear effects, we employ the panel quantile regression
technique to assess asymmetry in the impact of green finance on the low-carbon energy
transition. Table 7 presents the estimation results at the 20th, 40th, 60th, and 80th quantiles.
The results indicate a positive coefficient on green finance across all quantiles, statistically
significant at the 1% level, with its magnitude tending to increase as the quantile rises.
This suggests a gradual amplification of the effect of green financing as the low-carbon
energy transition progresses, indicative of a nonlinear relationship. Economies with more
advanced transitions often possess well-established renewable energy generation infrastruc-
ture, advanced energy storage technologies, and supportive policy environments, includ-
ing renewable energy quotas and subsidies (Carley and Konisky 2020). These favorable
infrastructural conditions likely enhance the effectiveness and efficiency of green finance
inflows.

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Table 6 Heterogeneity checks: effects of green financing on low-carbon energy transition in different income
groups, IV estimates
Dependent variable: rc
Variables Low income High income
(1) (2)
gf 0.050*** 0.062
(0.013) (0.076)
eco 0.041*** 0.155***
(0.014) (0.023)
urb 3.241 107.6***
(2.251) (9.198)
ind − 3.265*** − 9.540**
(1.239) (3.867)
pop 0.449** -4.582
(0.221) (4.520)
fdi 2.376 3.289
(3.061) (3.526)
coal − 27.95*** − 108.4***
(9.597) (31.14)
read − 83.39 − 1,125**
(77.31) (477.6)
Constant − 202.2 − 10,521***
(176.6) (745.5)
Year fixed Yes Yes
Country fixed Yes Yes
Obs. 234 334
Number of countries 13 19
R-squared 0.909 0.913
KP rk LM 204.6 284.4
P-value of KP rk LM 0 0
KP rk Wald F 1365 1663
Stock-Yogo 16.38 16.38
This table presents the estimates of green financing’s impact on renewable energy consumption for
different income groups, as shown in columns (1) through (2), respectively. Specifically, rc refers to the
consumption of renewable energy (TWh). The low-income and high-income groups are based on the
World Bank income classification criteria. In all models, year and individual (country) effects are fixed
to control for the effects of confounding factors. Kleibergen-Paap rk LM statistic is used to test whether
the instrumental variable can be identified. Kleibergen-Paap rk Wald F-statistic is used to test whether the
instrumental variable is a weak instrument. The Stock-Yogo statistic refers to the critical value at the 10%
level provided by Stock and Yogo (2005) for identifying weakly instrumented variables. ***, **, and *
refer to statistical significance at the 1%, 5%, and 10% levels, respectively

5 Effect of Digital Economy on the nexus between Green Financing

and low-carbon Energy Transition

The growth of digital economy has facilitated numerous international green financing initia-
tives (Akberdina et al. 2024). However, empirical evidence quantifying its impact remains
scarce. Therefore, we delve deeper into the digital economy’s role in driving the transition
to renewable energy by examining its moderating effects on financing. Table 8 presents
the IV estimates, elucidating its influence on renewable energy consumption and various

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Table 7 Heterogeneity checks: effects of green financing on low-carbon energy transition at different quantile
levels, quatile estimates
Dependent variable: rc
Variables 20th 40th 60th 80th
(1) (2) (3) (4)
gf 0.025*** 0.068*** 0.196*** 0.288***
(0.003) (0.007) (0.006) (0.025)
eco 0.000* 0.004*** 0.003*** 0.004***
(0.000) (0.001) (0.000) (0.001)
urb − 0.195*** 0.469*** 0.432*** 0.586***
(0.029) (0.030) (0.058) (0.075)
ind 0.222*** − 0.931*** − 0.815*** −
0.684***
(0.067) (0.038) (0.036) (0.111)
pop − 0.024*** − 0.001 − 0.000 0.036***
(0.005) (0.003) (0.003) (0.005)
fdi − 0.056 0.203*** 0.141 − 0.131
(0.038) (0.052) (0.102) (0.284)
coal 1.792*** − 1.144 20.57*** 183.6***
(0.304) (1.114) (0.795) (11.12)
read 55.77*** 23.72*** 99.04*** 225.0***
(2.550) (7.606) (6.935) (8.379)
Year fixed Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes
Obs. 568 568 568 568
Number of countries 32 32 32 32
This table presents the estimates of green financing’s impact on renewable energy consumption at different
quantile levels (including 20th, 40th, 60th, and 80th quantiles), as shown in columns (1) through (4),
respectively. Specifically, rc refers to the consumption of renewable energy (TWh). The panel quantile
regression technique is used. In all models, year and individual (country) effects are fixed to control for
the effects of confounding factors. ***, **, and * refer to statistical significance at the 1%, 5%, and 10%
levels, respectively

energy types. Column (1) of the results demonstrates a positive facilitating effect of digital
economy development on renewable energy consumption, a finding consistent with prior
literature (Xu et al. 2022). Furthermore, it amplifies the positive impact of green financing
on renewable energy consumption, as evidenced by significantly positive coefficients of the
interaction terms between digital economy ( de ) and green financing ( gf ). This indicates
a constructive moderating effect of the digital economy on the relationship between green
financing and the low-carbon energy transition. Hypothesis H2 is thus validated.
The results also demonstrate the moderating influence of the digital economy on vari-
ous energy sources. Building upon the main regression findings, we observe that the digital
economy contributes to the increase in hydro and wind energy consumption. This observa-
tion aligns with specific studies conducted in countries such as China (Zheng and Wong
2024). The promotion of technological innovation in hydro and wind energy by the digital
economy could be an important channel (Yi et al. 2024). Therefore, the digital economy can
facilitate the promotion of green financing on hydro and wind energy consumption, i.e., the
positive moderating effect of digital economy still exists in hydro and wind energy models.

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Table 8 Mechanism checks: effects of digital economy on the nexus between green financing and low-carbon
energy transition, IV estimates
Dependent variable: rc bc hc sc wc
Variables (1) (2) (3) (4) (5)
gf 0.252** 0.013 0.169** 0.014 0.039**
(0.118) (0.011) (0.086) (0.010) (0.019)
eco − 0.014 0.001 − 0.011 − 0.000 − 0.001
(0.012) (0.001) (0.009) (0.001) (0.002)
urb − 3.391 0.590* − 2.092 − 0.468** −
0.980**
(2.478) (0.311) (1.805) (0.203) (0.403)
ind 4.958 − 1.705*** 4.031 0.415 1.221**
(3.513) (0.407) (2.559) (0.284) (0.572)
pop 0.178 0.046 0.132 0.008 0.021
(0.169) (0.043) (0.123) (0.014) (0.027)
fdi − 8.502 0.612 − 6.926 − 0.415 − 1.221
(7.004) (1.579) (5.102) (0.566) (1.140)
coal 103.1*** − 2.130 89.29*** 2.013 9.086
(36.38) (2.870) (26.50) (2.952) (5.922)
read 766.5 57.59 704.1* 24.12 86.97
(528.6) (47.70) (385.0) (42.66) (86.05)
de 1,328*** 13.96 948.6*** 73.91*** 179.3***
(230.6) (24.45) (168.0) (18.69) (37.54)
de*gf 2.415*** 0.106*** 1.645*** 0.144*** 0.398***
(0.461) (0.039) (0.336) (0.037) (0.075)
Constant − 321.8 − 5.171 − 292.7 − 8.907 − 42.13
(298.0) (35.61) (217.0) (24.14) (48.51)
Year fixed Yes Yes Yes Yes Yes
Country fixed Yes Yes Yes Yes Yes
Obs. 443 285 443 434 443
Number of countries 25 17 25 25 25
R-squared 0.256 0.216 0.250 0.184 0.238
KP rk LM 378.6 233.5 378.6 370.9 378.6
P-value of KP rk LM 0 0 0 0 0
KP rk Wald F 2438 1166 2438 2388 2438
Stock-Yogo 16.38 16.38 16.38 16.38 16.38
This table presents the moderating effects of digital economy on the relationship between green financing
and renewable energy consumption as well as different energy types, as shown in columns (1) through
(5), respectively. Specifically, the variables, rc, bc, hc, sc and wc refer to the consumption of renewable
energy (TWh), biomass energy (TWh), hydro energy (TWh), solar energy (TWh), and wind energy (TWh),
respectively. In all models, year and individual (country) effects are fixed to control for the effects of
confounding factors. Kleibergen-Paap rk LM statistic is used to test whether the instrumental variable
can be identified. Kleibergen-Paap rk Wald F-statistic is used to test whether the instrumental variable
is a weak instrument. The Stock-Yogo statistic refers to the critical value at the 10% level provided by
Stock and Yogo (2005) for identifying weakly instrumented variables. ***, **, and * refer to statistical
significance at the 1%, 5%, and 10% levels, respectively

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 R. Nepal et al.

On the one hand, the positive impact of digital economy on the low-carbon transition
may arise from its benefits in digital infrastructure development, social impact, support,
and digital trade. Initially, the advancement of the digital economy heavily relies on digital
infrastructure (Luo et al. 2021). For instance, China is implementing policies to encourage
increased investment in new infrastructure, encompassing 5G infrastructure, new energy
charging stations, and big data centers (MIIT 2021). Sophisticated digital infrastructures,
such as energy internet platforms (Lin and Huang 2023) and smart grid construction (Shah-
baz et al. 2022), can offer superior dual detection, management, and optimization tools for
clean energy projects (Chowdhury et al. 2022). Secondly, digital technology development
fosters various forms of social networking interactions and digital telecommuting (Stermieri
et al. 2023), gaining heightened recognition and acceptance among social groups. Extensive
social engagement and raised awareness levels aid in steering the energy sector towards
low-carbon avenues, such as users’ endeavors to alter home energy consumption patterns
(Torriti 2017). Moreover, the significance of digital trade in facilitating low-carbon energy
transition warrants attention. Digital trade facilitates cross-border technological innovation
and knowledge transfer. Firms can communicate internationally through digital channels,
thereby accessing advanced environmental technologies, management expertise, and inno-
vation models (Cui et al. 2022; Xiong and Luo 2023). Digital trade also fosters intergovern-
mental collaboration and standardization, thus diminishing barriers to clean energy projects.
On the other hand, the digital economy’s role in optimizing the allocation of green finan-
cial resources confers a notable advantage in attracting green financing. Akberdina et al.
(2024) observe that the integration of digital technologies in the environmental sector drives
the growth of environmental finance in Russia, particularly in the energy sector, leading to
significant investment inflows in new environmental technologies. Similarly, in a study by
Liu and Zhu (2024), the beneficial effect of digital economy on green financing allocation
is identified, enhancing the carbon efficiency improvement of green finance. The adoption
of digital technologies, such as blockchain technology, aids in enhancing the security and
traceability of financial transactions, reducing financing costs and risks (Li et al. 2024).

6 Conclusions and Policy Suggestions

6.1 Conclusions

This study empirically examines the impact of international green financing on the low-
carbon energy transition in developing countries and identifies the moderating effect of
the digital economy on their relationship. Overall, we emphasize the following findings:
First, green financing effectively promotes the low-carbon energy transition in developing
countries, particularly evident in its positive impact on hydro and wind energy consumption.
Additionally, green financing catalyzes the transition in the power sector, corroborating the
robustness of the results. Second, we observe income heterogeneity and nonlinear effects in
the impact of green financing on the low-carbon energy transition. It notably facilitates the
transition in low-income economies facing financing challenges compared to high-income
counterparts. Moreover, its effectiveness increases progressively as the energy transition
advances. Lastly, the digital economy significantly contributes to driving the low-carbon
energy transition and enhances the role of green finance therein. These findings offer empiri-

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Green Financing, Energy Transformation, and the Moderating Effect of…

cal evidence supporting international green financing and underscore the pivotal role of
digital economy in advancing the low-carbon energy transition.

6.2 Policy Suggestions

According to the primary findings of our study, we offer policy insights for policymakers in
the following areas.
To advance the global low-carbon energy transition, we recommend scaling up green
financing for developing economies based on existing commitments. Investors should
explore clean energy project investment opportunities in regions with limited financing,
aiding their transition to a low-carbon model and contributing to global greenhouse gas
emission reduction under the Clean Development Mechanism framework. Simultaneously,
beneficiary countries must enhance green financing regulations, ensuring transparency, sus-
tainability, and the establishment of clear standards and review mechanisms to mitigate
“greenwashing” risks.
Optimizing the allocation of green financial resources among energy types is critical
for investment efficiency. Investment decisions should consider resource endowments and
expected returns. In regions with high energy poverty levels, supporting stable hydro energy
may secure energy supplies. However, long-term low-carbon and sustainable development
benefit from prioritizing investments in flexible wind and solar projects with higher future
returns.
Promoting the digital economy is vital for driving the low-carbon energy transition. Gov-
ernment agencies play a pivotal role in guiding digital economy development. Governments
should encourage investment in energy digital infrastructure, including smart grids, data
management, and energy storage technologies, to enhance power system digitization. Addi-
tionally, they should foster digital technology innovation and application in energy project
financing to bolster financing security and reduce costs. Educational initiatives to enhance
digital literacy will facilitate the transition to a digital society, increasing public engagement
in green financing and sustainable development.

6.3 Limitations and Potential Future Research Directions

The digital economy index we constructed provides empirical evidence for the existence
of digital economy’s impact on the relationship between green finance and the low-car-
bon energy transition. It does not quantify the economic consequences of digital economy
development on energy transition in developing countries. Future research could explore
the impact of digitalization more precisely. Additionally, due to data limitations, our study
does not encompass all developing economies. Future research could explore datasets with
broader coverage and improved representation.

13
 R. Nepal et al.

Appendix A

Table A1 Results of the multicollinearity test

Variables VIF 1/VIF
gf 1.06 0.9450
eco 1.86 0.5388
fdi 1.09 0.9167
pop 1.68 0.5950
urb 2.27 0.4401
ind 1.16 0.8589
coal 1.09 0.9216
read 1.29 0.7760
Mean VIF 1.44
This table presents the results of multicollinearity test using the variance inflation factor (VIF). In
empirical economics research, if VIF is greater than 10, it is considered that there is a serious covariance
problem in the model

Table A2 Effects of green financing on low-carbon energy transition, OLS and RE estimates
Dependent variable: rc
Variables OLS RE
(1) (2)
gf 0.310*** 0.077*
(0.115) (0.043)
eco 0.016** 0.151***
(0.008) (0.016)
urb − 0.621 33.15***
(1.485) (4.890)
ind 5.132* −
8.337***
(2.828) (2.719)
pop 0.052 1.661***
(0.043) (0.462)
fdi − 7.476** 5.499*
(3.588) (3.052)
coal 96.95*** −
118.2***
(31.71) (23.99)
read 1,875*** − 118.9
(516.6) (273.7)
Constant − 753.5*** −
2,266***
(220.8) (343.6)
Year fixed Yes Yes
Country fixed No Yes
Obs. 568 568
R-squared 0.120
This table presents the estimates of green financing’ impact on the consumption of renewable energy. ***,
**, and * refer to statistical significance at the 1%, 5%, and 10% levels, respectively

13
Green Financing, Energy Transformation, and the Moderating Effect of…

Acknowledgements The article is supported by the National Social Science Foundation of China (Grant No.
23VMG006). The authors acknowledge the useful comments from the Editor and anonymous reviewers.
Certainly, all remaining errors are our own.

Author contributions Rabindra Nepal: Conceptualization, and Visualization; Writing– review & editing,
Supervision. Yang Liu: Data curation, Methodology, Software, and Writing– original draft; Kangyin Dong:
Conceptualization, Writing– review & editing, and Funding acquisition; Tooraj Jamasb: Conceptualization,
Supervision, and Writing– review & editing.

Funding Open access funding provided by Copenhagen Business School.

Data availability The data that support the findings of this study are available from the corresponding author
upon reasonable request.

Declarations

Conflict of interest No potential conflict of interest was reported by the authors.

Open Access This article is licensed under a Creative Commons Attribution 4.0 International License,
which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as
you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons
licence, and indicate if changes were made. The images or other third party material in this article are
included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material.
If material is not included in the article’s Creative Commons licence and your intended use is not permitted
by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the
copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.

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