Renewable Energy Transition and Environmental Quality in OECD Economies: Evidence from Second-Generation Dynamic Panel Estimation

This study explores the impact of renewable energy consumption on environmental quality in ten OECD economies over the period 1990–2024, aiming to assess its contribution as a structural driver of decarbonization in advanced economies. Given the presence of strong cross-sectional dependence and heterogeneous country dynamics, the analysis employs second-generation panel econometric techniques. Stationarity is assessed using the CIPS unit root test. Long-run relationships are examined using the Westerlund error-correction-based cointegration approach. Long-run elasticities are estimated using the Common Correlated Effects Mean Group (CCE-MG) and Augmented Mean Group (AMG) estimators. Short-run dynamics are analyzed within a panel error-correction framework. The results confirm the existence of a stable long-run equilibrium relationship among the variables. Renewable energy consumption is associated with a negative effect on CO2 emissions, with the CCE-MG estimate indicating that a 1% increase in renewable energy reduces emissions by approximately 0.067%, although the long-run statistical significance remains marginal. In the short run, renewable energy is also associated with lower emissions, indicating both structural and immediate mitigation dynamics. By contrast, energy consumption and financial development increase emissions, while economic growth does not exhibit a robust long-run effect, providing no support for the Environmental Kuznets Curve hypothesis. The error-correction term confirms rapid convergence toward long-run equilibrium. Robustness analysis using carbon intensity as an alternative environmental indicator yields consistent findings. In sum, the results suggest that renewable energy expansion should be complemented by energy efficiency policies and the reorientation of financial systems toward green investments to achieve effective decarbonization. From a policy perspective, coordinated strategies integrating renewable deployment, efficiency improvements, and sustainable finance are essential for achieving long-term environmental sustainability in OECD economies.