Do Structural Transformations in the Energy Sector Help to Achieve Decarbonization? Evidence from the World’s Top Five Green Leaders

Abstract

The purpose of this study is to examine the role of structural transformation in the energy sector to accelerate the decarbonization process in the world’s top five green leaders, Germany, Canada, Sweden, Denmark, and Poland. To test this empirically, we collected annual data from a panel of the top five green leaders from 2000–2023. A key contribution of our study lies in assessing multiple critical metrics, including CO2 emissions, carbon intensity, carbon intensity of electricity, production-based carbon emissions, and consumption-based carbon emissions, to capture holistic progress towards carbon neutrality. We applied the augmented mean group (AMG) model to estimate the long-term results. The Dumitrescu–Hurlin test is used to test the causal relationship among the modeled variables. The findings of the AMG model reveal that renewable energy production and consumption significantly reduce CO2 emissions, production-based CO2 emissions, consumption-based CO2 emissions, carbon intensity, and the carbon intensity of electricity. Conversely, fossil-fuel-derived energy exacerbates these metrics. However, the impact of these energy sources varies by country in terms of their magnitude. The outcomes of the Dumitrescu–Hurlin test indicate that a bidirectional causality exists between renewable energy production and CO2 emissions and between renewable energy consumption and carbon intensity. However, a unidirectional causality exists between fossil fuel consumption and CO2 emissions and between renewable energy consumption and the carbon intensity of electricity. Our results indicate the detrimental impacts of continued fossil fuel use and conclude that a structural transformation in the energy sector is critical to decarbonization. Based on our results, we suggest that policy efforts should prioritize structural reforms in the energy sector by emphasizing a shift towards renewable energy sources. Such reforms are essential for achieving net-zero carbon emissions and mitigating broader environmental degradation.