Environmental Innovation for a Low‐Carbon Economy: The Role of R&D and Financial Sector Development

ABSTRACT This study explores the realm of environmental innovation as a driver of a low‐carbon economy, with a specific focus on the roles played by R&D activities and financial sector development. Centered in the context of Saudi Arabia, the research aims to explore how advancements in environmental technologies, coupled with robust R&D efforts and a thriving financial sector, can pave the way for a sustainable transition towards a low‐carbon economy. By examining the synergistic effects of environmental innovation, R&D investments, and financial sector development, the study seeks to elucidate the pathways through which these factors collectively contribute to fostering a greener and more sustainable economic landscape in Saudi Arabia. The empirical results confirm that environmental innovation has a significant impact on reducing carbon intensity. Moreover, interaction analyses reveal that the influence of environmental innovation on carbon intensity becomes stronger when supported by higher levels of financial development and R&D investment. The negative coefficients of the interaction terms signify a positive amplifying effect, indicating that finance and R&D enhance the ability of innovation to reduce carbon intensity. These findings underscore the importance of developing an integrated policy ecosystem that simultaneously fosters environmental innovation, enhances R&D investment, and promotes sustainable finance. For Saudi Arabia, such an approach is essential to achieving the Vision 2030 objectives of economic diversification and carbon neutrality. The study provides policymakers with practical insights, emphasizing the importance of targeted R&D programs, green financial instruments, and institutional coordination in promoting a sustainable and innovation‐driven low‐carbon transition.