Understanding the dynamics of public debt on renewable energy investment in developing countries

In developing economies, rapid growth is closely tied to public debt (PD), which can impact investment in the energy sector, including renewable energy (RE). Previous studies have examined the impact of PD on RE consumption, but the channel needs to be clarified. The relationship between PD and RE consumption can be influenced by the extent of public investment in RE, which acts as the channel connecting PD to RE consumption. However, the direct impact of PD on public investment in RE remains unexplored. Therefore, this study examines the impact of PD on public investment in RE in 71 developing countries from 2000 to 2020. Using Driscoll–Kraay standard errors, IV-GMM, and quantile regression, this study uncovers an inverse U-shaped relationship between PD and public investment in RE. PD supports public investment in RE up to a certain level, but higher levels of PD hinder further public investment in RE. The study also explored the moderating role of financial institutions and markets on public investment in RE at different levels of PD. It finds that countries can effectively use PD in favorable financial environments to counteract the negative impact on public investment in RE. The results emphasize the need for balanced PD management, robust economic conditions, and solid financial institutions to promote sustainable public investment in RE in developing countries. • We identified public debt levels where investment impact shifts across quantiles. • Inverse U-shaped relationship between renewable energy investment and public debt. • Solid financial institutions boost renewable energy through efficient capital allocation. • Financial markets initially aid but later can crowd out public investment in renewable energy. • Balanced debt management and robust financial environments are key to sustainable investment in renewable energy.