Dynamic Common Correlated Effects of Green Innovation Funding and Green Trade on Environmental Quality in OECD Countries

Achieving the Sustainable Development Goals (SDGs) and carbon neutrality targets presents a critical challenge for the Organization for Economic Co-operation and Development (OECD) countries, which account for over 37% of global carbon emissions and have experienced rising ecological degradation over recent decades. While previous research has explored the effects of green innovation and trade on environmental outcomes, these studies overlook the funding dimension of green innovations and fail to isolate eco-friendly goods within trade measures. To address this gap, our study evaluates the dynamic impact of green innovation funding and green trade on environmental quality in OECD countries from 1994 to 2021. Unlike traditional models relying on trade openness indices, we focus specifically on the dynamic common correlated effects (DCCE) estimator to mitigate cross-sectional dependence issues neglected by AMG and MG estimators. Results reveal that public funding for green innovations, in the form of government allocations for research, development, and demonstration, significantly reduces carbon emissions. Additionally, green trade has a substantial negative effect on emissions, promoting environmental sustainability. The robustness of these findings is confirmed through PMG estimation. These findings suggest that policymakers in OECD countries should increase budget allocation for green technology innovations and expand trade volume of environmentally friendly goods and services to foster environmental quality and achieve environmental sustainability goals.