Do Financial and Technological Innovations Enhance Environmental Quality? Empirical Evidence from the EU Countries

This paper aims to investigate the long-term effects of financial innovations (FI) and technological innovations (TI) on carbon dioxide emissions (CO2) in the EU from 2001 to 2022. The ratio of the aggregate money supply to narrow money (M3/M1) is used as a proxy for FI, and the total number of patents is used as a measure of technological innovation. The research applies Westerlund cointegration, augmented mean group estimator (AMG), and Dumitrescu-Hurlin causality tests. The empirical results demonstrate that the variables are cointegrated, and FI and TI contribute to reducing CO2 emissions. Additionally, the study finds that an increase in LGDP is associated with higher CO2 emissions. At the same time, the square of LGDP is linked to a reduction in CO2 emissions, supporting the Environmental Kuznets Curve (EKC) hypothesis. According to the Dumitrescu-Hurlin causality results, a unidirectional causality relationship exists between financial and technological innovations and CO2 emissions. These findings stress the importance of increased funding and grants to align with the Union's 2030 targets. Financial incentives should promote investments in the next generation of low-carbon technologies, supporting Europe's shift towards climate neutrality.