The Role of Hydropower, Clean Energy, Renewable Energy, FDI, and Capital Formation in Affecting CO ₂ Emissions and Environmental Sustainability in South Asia

Rapid industrialization and economic growth in South Asia have intensified concerns about environmental sustainability, particularly regarding CO₂ emissions. This study examines the impact of hydropower energy (HPE), financing for clean energy (FCE), foreign direct investment (FDI), gross fixed capital formation (GFCF), and renewable energy consumption (REC) on CO₂ emissions and broader environmental sustainability indicators in South Asian countries from 2004 to 2022. To ensure robust analysis, panel unit root tests, including Phillips and Perron (PP), augmented Dickey–Fuller (ADF), and cross-sectionally augmented lm–Pesaran–Shin (CIPS), are applied to check stationarity, while the Westerlund cointegration test is employed to assess long-run relationships. The study utilizes the common correlated effects mean group (CCEMG) estimator as the primary regression technique, with augmented mean group (AMG) and mean group (MG) estimators for robustness. The findings reveal that REC significantly reduces CO₂ emissions, indicating its role in promoting environmental sustainability. However, HPE and FDI are positively associated with CO₂ emissions, suggesting potential inefficiencies in energy production and capital investment. Meanwhile, FCE and GFCF exhibit an insignificant relationship with CO₂ emissions. These results highlight the need for policymakers to optimize energy infrastructure, encourage sustainable investment practices, and integrate cleaner energy solutions to mitigate environmental degradation. The study provides valuable insights into the energy-emission nexus, offering a strategic direction for South Asia’s sustainability efforts.