Financial inclusion and political institutions’ role in renewable energy transition: what does the data say?

This study examines the contributory role of financial inclusion and political institutions in the global agenda to transition towards a renewable energy economy using a comprehensive panel dataset for 119 countries between 2004 and 2020. For the empirical analysis, this study adopted the dynamic two-step generalized method of moment estimator to address endogeneity. The findings show that financial inclusion has a positive and statistically significant effect on renewable energy usage. Also, the political institutions’ variables have a significant and positive effect on renewable energy usage. These findings remain robust even when the Driscoll-Kraay estimator is applied to address cross-sectional and temporal dependence. The study also explores whether the impact of financial inclusion on renewable energy is influenced by the state of political institutions using the Partially Linear Functional Coefficient (PLFC) model. The PLFC model demonstrates that with an improvement in political institutions’ variable scores, financial inclusion significantly stimulates renewable energy usage. Finally, financial inclusion and political institutions have a heterogeneous effect on renewable energy across geographical regions. These findings underscore the need to integrate financial inclusion in energy transition policies and also strengthen political institutions to facilitate the global energy transition agenda.