Could Globalisation and Renewable Energy Contribute to a Decarbonised Economy in the European Union?

Abstract

This study investigates the impact of globalisation, renewable energy consumption, and economic growth on CO2 emissions in 26 European Union (EU) countries, in the period 1990–2020. Second-generation panel unit root tests are applied, the Westerlund cointegration test is used, and a panel of fully modified least squares (FMOLS) and dynamic ordinary least squares (DOLS) techniques are employed to estimate the long-term relationship between variables. The causality relationship among the considered variables is identified using the heterogeneous Dumitrescu–Hurlin causality test. It was found that globalisation and renewable energy consumption contributed to the carbon emissions’ mitigation, while economic growth induced their increase. The results are robust when control variables (i.e., financial development, foreign direct investment, and urbanisation) are added to the model. Foreign direct investment and urbanisation are contributors to carbon emissions’ increase, whereas financial development induces their decrease. The effect of the considered variables on carbon emissions is differentiated by economic development and level of institutional quality. Unidirectional causality relationships were identified from globalisation to carbon emissions and from carbon emissions to foreign direct investment and bidirectional relationships were found between economic growth, renewable energy consumption, financial development, and carbon emissions. The policy implications of the results are also discussed.