Do innovation and renewable energy transition play their role in environmental sustainability in Western Europe?

Rising CO2 emissions, a major component of greenhouse gases (GHGs), are driving global warming. Technological advancements, while contributing to economic growth, often increase energy demand and pollution. The UN's Sustainable Development Goals (SDGs) aim to mitigate this, with Western European countries striving to reduce CO2 emissions. However, progress remains uneven. Western Europe demonstrates a high level of innovation, as evidenced by its numerous patents, and a significant commitment to renewable energy. This study explores the relationship between renewable energy transition (RET), patents (representing innovation), and CO2 emissions in 25 Western European countries between 1995 and 2020. It aims to assess the effectiveness of these factors in achieving environmental sustainability, addressing a gap in existing literature which often uses limited samples or focuses solely on renewable energy consumption (REC) without considering RET or a comprehensive analysis of patents' impact. The interconnectedness of Western European economies due to trade and environmental agreements necessitates the use of cross-sectional dependence (CD) techniques in the analysis.

Existing literature highlights the dual nature of technological progress's impact on the environment. While innovation can enhance energy efficiency and renewable energy use, leading to a shift towards cleaner energy sources, it can also increase energy demand and pollution. Studies have shown that REC and human capital improve environmental quality while urbanization and structural transitions negatively impact it. Research using proxies like R&D and patents has produced mixed results on innovation's impact on CO2 emissions, with some showing a negative relationship in various European contexts. Studies focusing on REC have consistently found its negative impact on emissions. The current study complements these efforts by incorporating RET as a crucial factor and utilizing patents as a direct measure of innovation within the Western European context, filling existing gaps.

The study hypothesizes a nonlinear relationship between economic growth (GDP per capita) and CO2 emissions, reflecting the EKC hypothesis. A quadratic term for GDP per capita is included, along with RET (ratio of REC to non-REC energy consumption) and the number of patent applications. The model is specified as CO2 = f(Y, Y², RET, PAT). Data for GDP per capita and patents come from the World Bank, while data for energy consumption comes from BP. CO2 data is sourced from the Global Carbon Atlas. The analysis considers the period 1995–2020. Due to expected cross-sectional dependence (CD) amongst Western European countries stemming from trade and environmental agreements, CD techniques are employed. The Breusch-Pagan LM test and Pesaran scaled LM test are used to assess CD in the variables and residuals. Pesaran's CD unit root tests (CADF and CIPS) determine the order of integration. Westerlund's CD cointegration test is applied, followed by Pesaran and Yamagata's test for slope heterogeneity. Finally, a CD-ARDL model is used for long-run and short-run analysis. The turning point of the EKC is calculated from the estimated coefficients.

The analysis reveals the presence of an EKC in both the long and short run. The long-run turning point is estimated at a GDP per capita of $50,287, with Denmark, Iceland, Sweden, Ireland, Norway, Luxembourg, and Switzerland exceeding this level in 2020, suggesting that their economic growth is positively affecting their environment. The short-run turning point is $57,320. RET demonstrates a significant negative impact on CO2 emissions, both in the long and short run, indicating that transitioning to renewable energy significantly helps in reducing emissions. Patents show a significant negative impact on CO2 emissions only in the long run, suggesting that while innovation does play a role in environmental sustainability, its effect takes time to manifest. The error correction term (ECT) is negative and significant, showing convergence from short-run disequilibrium to long-run equilibrium.

The findings support the EKC hypothesis, demonstrating that economic growth's environmental impact changes with different levels of development. RET's consistently negative effect emphasizes the importance of renewable energy transitions in mitigating climate change. The lagged effect of patents underscores the time required for innovative technologies to fully impact emissions. These findings align with other studies that reveal the significant role of REC in emission reductions, but they also highlight the broader impact of a transition to renewable sources rather than just focusing on consumption levels. The study's use of CD techniques appropriately addresses the interconnected nature of Western European economies. The results provide valuable insights for policymakers in Western Europe.

This research validates the EKC hypothesis in Western Europe and highlights the crucial roles of RET and innovation (represented by patents) in environmental sustainability. RET effectively reduces emissions in both the short and long run, while the beneficial effects of innovation are seen primarily in the long term. The study recommends policies promoting rapid RET and investments in R&D to generate environmentally friendly technologies. Future research could investigate RET from various renewable energy sources individually and analyze a larger sample of European countries for broader applicability.

The study uses aggregated REC data for the RET variable, which could mask differences in the effects of various renewable energy sources. The sample excludes some smaller Western European economies due to data limitations, potentially affecting the generalizability of findings. Future research might address these limitations by disaggregating renewable energy sources and expanding the sample size.