The threshold effect of energy transition on CO₂ emissions and physical climate risk nexus: a novel perspective

Purpose This study aims to examine the threshold effect of energy transition on the relationship between CO 2 emissions and physical climate risk in OECD countries. Design/methodology/approach The research employs a Threshold Autoregressive Distributed Lag model and reveals a two-regime relationship. The study is spread over a 21-year period from 2000 to 2020 across 45 OECD countries. Findings Our findings demonstrate a significant impact of CO 2 emissions on climate risk below the energy transition threshold. However, once this threshold is surpassed, the influence of CO 2 emissions on climate risk is reduced, resulting in a statistically insignificant relationship. The analysis also delves into the individual and combined impacts of various renewable energy sources (solar, wind, hydro, geothermal and biomass) relative to fossil fuels, pinpointing specific threshold levels across developed and developing OECD countries. Practical implications Combating climate change demands a drastic reduction in CO 2 emissions, requiring a global energy transition. This crucial process necessitates concerted action between developed and developing countries. An environmental policy stringency, supported by a firm financial commitment from banks and institutions toward green finance, is essential. Each country must strive to identify its “resilience threshold”, the point at which the share of renewable energies in its energy mix allows it to minimize the physical climate risk. Closely monitoring the evolution of this ratio (renewable energies/fossil fuels) is therefore paramount. Originality/value This study addresses a gap in existing literature by showing that developed countries need to reach a higher level of renewable energy consumption to effectively decouple CO 2 emissions from climate risk. These insights highlight the critical importance of achieving a significant energy transition to mitigate climate risks and emphasize the need for targeted environmental policies and investment strategies that consider the differential thresholds across countries.