Exploring the relationship between CO2 emissions, economic growth, urbanization, renewables and foreign investment in Iceland

Iceland continues to face CO 2 emission challenges despite its near-total reliance on renewable energy. This study analyzes the effects of GDP per capita, renewable energy consumption (RENC), foreign direct investment (FDI), and urbanization on CO 2 emissions from 1990 to 2023, using an ARDL model within the Energy Kuznets Curve framework. Robustness is confirmed using CCR, FMOLS, and DOLS estimators. Findings show that a 1 % increase in GDP per capita reduces CO 2 emissions by approximately 0.99 units in the long run, indicating progress toward decoupling economic growth from emissions. RENC initially increases emissions by 21.97 units per 1 % rise, but the negative squared term (−2.60) suggests a turning point where further increases reduce emissions. Urbanization raises emissions by 20.71 units per 1 % increase, while FDI’s impact is statistically insignificant. These results support Iceland’s shift toward a low-carbon economy. To meet its 2040 carbon neutrality target, Iceland should accelerate renewable investments, promote sustainable urbanization, and focus FDI on clean technologies. • Determinants of CO 2 emissions in Iceland (1990–2023). • An ARDL model, Energy Kuznets Curve framework. • Fully modified ordinary least squares and Dynamic ordinary least squares. • A 1 % increase in GDP leads to a reduction in CO 2 emissions of 0.99 units. • RENC follows a non-linear path where emissions decline beyond a threshold.