Industrial Boom Versus Green Transition: Navigating CO 2 Challenges Through Finance, FDI , and Renewable Energy Pathways in Emerging Economies

ABSTRACT Sustainable growth has become a priority for emerging economies as rapid industrialization, globalization, and rising energy demand continue to intensify environmental pressures. This study examines the relationship between carbon dioxide (CO 2 ) emissions and key drivers such as renewable energy consumption, foreign direct investment, financial depth, manufacturing value added, and industrial output across the emerging seven (E7) economies (Brazil, China, India, Indonesia, Mexico, Russia, and Turkey) from 2000 to 2022. The analysis applies the method of moments quantile regression while accounting for cross‐sectional dependence and slope heterogeneity to capture variations across different emissions levels. The results show that renewable energy consumption reduces CO 2 emissions, underscoring the importance of clean energy transitions. Foreign direct investment is also associated with lower emissions, supporting the pollution halo effect, although its impact weakens in high‐emission contexts where investment remains concentrated in carbon‐intensive sectors. In contrast, financial depth increases emissions, indicating that current financial structures continue to support carbon‐heavy activities rather than sustainable investment. Manufacturing and industrial output also contribute significantly to emissions, highlighting the environmental cost of energy‐intensive production. Robustness tests confirm these findings, and cointegration results indicate a stable long‐term relationship among the variables. The study suggests that policymakers in E7 economies should strengthen green finance frameworks, attract environmentally responsible investment, and incentivize cleaner industrial practices to support a low‐carbon and competitive development trajectory aligned with global sustainability goals.