Climate governance and green innovation in Europe: New perspective

Green finance and energy taxes are the main national climate governance tools that have been appearing rapidly around the world in recent years. However, there is a paucity of empirical knowledge regarding the effectiveness of these instruments in stimulating green innovation in Europe. Employing data from 15 European Union countries from 2005 to 2021, we explore the impact of these tools on green innovation. Using sophisticated panel econometric methods, our findings show that green finance and energy taxes drive green innovation. The analysis also reveals a unidirectional influence of energy taxes and green finance on green innovation. A deeper analysis reveal that these tools are more effective in promoting green innovation in countries with low levels of energy taxes. The findings of this study yield important policy implications, suggesting that strengthening green finance, in combination with maintaining relatively low levels of energy taxation, may play a crucial role in fostering and accelerating green innovation in Europe. • The effect of green finance and energy taxes on green innovation is examined. • We used the MMQREG, DFE, and Granger non-causality methods. • Green finance (GREENF) and energy taxes (ET) promote green innovation in Europe. • Energy pricing strategy has a greater impact compared to green finance. • GREENF and ET are more effective in countries with low levels of energy taxes.