Financial development, green innovation, green tax, industrialisation, and environmental performance in South Africa: The mediating role of institutions

South Africa is transitioning from a coal-dependent economy toward a green energy pathway in alignment with its National Development Plan 2030 and global commitments to environmental sustainability. Despite notable efforts to reduce carbon emissions, South Africa remains among the top 15 % of largest emitters in the world, with coal accounting for 82.6 % of its energy mix and oil a further 16.6% (DBSA, 2024; Statista, 2024). The effectiveness of carbon tax (polluter-pays-principle) policies and financial mechanisms in promoting environmental sustainability remains contested, primarily due to weak institutional frameworks and regulatory challenges (Montmasson-Clair and Chigumira, 2020). Moreover, while green innovation holds significant potential for improving environmental outcomes, its adoption remains sluggish, hindered by limited financial development and policy inefficiencies. In response to these challenges, this research investigates the nexus between financial development, green innovation and green taxation in South Africa, with a specific focus on the mediating role of institutions. Employing annual data from 1990 to 2022 and applying the autoregressive distributed lag (ARDL) model, the fully modified ordinary least squares (FMOLS) for robustness, the Granger causality test and the two-stage least squares (2SLS) techniques, the study offers new empirical insights into these dynamics. The findings reveal that financial development and green innovation significantly enhance environmental outcomes, while green tax policies effectively incentivise eco-friendly practices and reduce carbon emissions. Importantly, the robust institutional frameworks are critical in reinforcing these effects by fostering transparency, accountability and policy effectiveness. Based on these results, the study recommends strengthening institutional capacities, expanding green tax frameworks, promoting financial inclusion to support green financing, and encouraging public-private partnerships to accelerate green innovation. This research contributes to the growing body of literature on sustainable development by proposing actionable strategies to achieve a low-carbon future in South Africa, with broader applications for other emerging economies undergoing similar transitions.