Does renewable energy consumption matter to reduce carbon emissions in low-and high-income countries? Evidence from the ARDL approach

Purpose This study aims to investigate the differential impacts of renewable energy consumption, gross domestic product (GDP) and foreign direct investment (FDI) on CO2 emissions across low- and high-income countries using time series data from 1960 to 2023. Given the growing importance of addressing climate change while fostering economic development, understanding the dynamic relationships between these variables is crucial for crafting effective environmental and economic policies. Design/methodology/approach This study uses the autoregressive distributed lag regression approach, which allows for the analysis of both short-run and long-run effects, while accounting for potential cointegration among the variables. Findings The results indicate that in low-income countries, renewable energy consumption has a statistically significant and dual effect on emissions, reducing CO2 in the short run but increasing it in the lagged period, indicating transition lags. FDI and GDP are not statistically significant. In high-income countries, however, current GDP increases emissions while lagged GDP decreases emissions, validating the environmental Kuznets curve hypothesis. Renewable energy reduces CO2 only in the short term. FDI is not important for the two groups. Originality/value These findings highlight the imperative to stimulate renewable energy production and consumption, especially in low-income countries, where long-term structural transformation requires sustained support. For rich countries, the findings highlight further the need for breaking the tie between emissions and GDP growth through advanced integration of renewables. Policymakers also need to evaluate the modest role of FDI and create investment policies to ensure environmental benefits.