Decarbonizing through disorder? How inflation, institutional quality, and green bonds drive energy market efficiency

The study investigates the interplay between green bonds, financial stability, governance, and energy market efficiency across 13 EU countries over the period 2013–2021. While existing research underscores the importance of green bonds in achieving ESG objectives, it often overlooks their specific role in shaping energy market efficiency and the institutional conditions that influence their effectiveness. By situating energy market efficiency within a broader macro-financial and political context, this study offers a more integrated perspective that accounts for financial market maturity and governance quality. Particular emphasis is placed on the evolution of green finance following the EU’s issuance of sovereign green bonds under the Next Generation EU framework. The analysis employs Dumitrescu-Hurlin causality tests, spatial econometric models, Vector Autoregression, Generalized Method of Moments, Generalized Least Squares, Feasible GLS, and mixed-effects estimators. The results uncover a bidirectional relationship between green bond issuance and energy efficiency (EE): green bond investments foster improvements in EE, while higher EE levels, in turn, attract further green finance. The analysis also highlights a lagged but significant effect of green bonds, reinforcing the importance of sustained, long-term financing for energy transitions. Moreover, financial instability emerges as a critical barrier to EE, constraining access to capital for long-horizon energy projects. The findings offer actionable guidance for policymakers, stressing the need for integrated strategies that align green finance with financial reform and institutional strengthening to advance the energy efficiency agenda.