Do green energies really extinguish emissions in middle‑income countries?

A research team examined 71 middle‑income countries – 32 upper‑middle and 39 lower‑middle – from 2002 to 2020 to pinpoint what drives their CO₂ emissions. They applied the GMM‑PVAR method, an advanced statistical tool that tackles reverse‑causality issues. The findings are striking: renewable‑energy use did not significantly cut emissions in either income group. In contrast, financial development consistently lowered emissions, by about 0.08 % in upper‑middle and 0.06 % in lower‑middle economies. Industrialization acted as a “bad boy” only for richer middle‑income nations, raising emissions by 2 %; it had no measurable effect in poorer ones. Granger‑causality tests showed a two‑way link between financial development and CO₂, but no direct link with renewables. In short, bolstering financial systems and greening industry appear more effective for curbing emissions than relying solely on green energy sources.

The analysis relies on a Panel Vector Autoregression (PVAR) model estimated with the Generalized Method of Moments (GMM). This combination is especially suitable for panel data with many cross‑sectional units (the 71 countries) and a limited time dimension (19 years). GMM corrects endogeneity—i.e., the possibility that variables influence each other simultaneously—by using internal instruments (lags of the variables themselves). PVAR, on the other hand, allows us to observe feedback dynamics among CO₂, renewable energy (RE), financial development (FD), and industrialization (IND).

Estimated coefficients reveal that a 1 % rise in FD reduces CO₂ emissions by 0.08 % in upper‑middle and 0.06 % in lower‑middle economies, suggesting that a deeper banking system can fund cleaner technologies or promote more efficient practices. The null effect of RE indicates that, in middle‑income countries, the share of renewables is still too small or poorly integrated to affect the overall energy mix. Industrialization, with a positive coefficient of 2.03 % only in upper‑middle nations, reflects a growth phase based on energy‑intensive sectors typical of economies transitioning to advanced production.

Granger‑causality tests confirm a bidirectional FD↔CO₂ relationship, implying that stronger financial policies can cut emissions, while environmental pressures can also drive financial reforms. The lack of RE→CO₂ causality shows that, without adequate regulatory frameworks or incentives, renewable expansion remains marginal.

Policy implications are therefore twofold: strengthen credit markets to support green investments and steer industrialization toward low‑carbon processes, for example through environmental standards, carbon taxes, or energy‑efficiency incentives. Study limitations include possible homogeneity in RE data (often aggregated at the national level) and the absence of environmental governance variables, which could explain further cross‑country differences.