Green finance and renewable energy mix: Evidence from emerging countries

Abstract

Green finance is recognized as an effective tool for promoting renewable energy sources. This is crucial not only in advanced economies but also in developing countries, even with less mature capital markets. A significant gap in the literature is the failure to distinguish that not all renewable energy sources are environmentally beneficial. Renewable energy can be categorized into traditional and modern renewables, with the latter being more environmentally friendly. This study poses the questions: How does green finance relate to the mix of renewable energy in emerging countries? Are there any differences in the relationship across the income levels of these countries? To explore these questions, this study employs the method of augmented mean group. The findings indicate that in relatively high-income emerging countries, green finance has positive and negative long-run associations with modern and traditional renewables, respectively. Conversely, no significant relationship is observed in lower-income emerging countries. Green finance facilitates the transition from traditional to modern renewables only in higher-income emerging economies. The international community should focus on increasing green finance to support modern renewables in high-income emerging countries, while also advocating for financial market reforms to enhance the effectiveness of green finance in low-income emerging countries.