Evaluating the role of renewable energy and government consumption in reducing CO2 emissions: A dynamic panel data analysis

• Primary Focus: The study uniquely investigates the combined and interactive effects of renewable energy adoption and government spending on CO₂ emissions in Lower-Middle-Income Countries (LMICs), rather than looking at them separately. • Core Findings: ○ Renewable Energy: A 1 % increase in renewable energy consumption leads to a 0.025 % reduction in CO₂ emissions. ○ Government Spending: A 1 % increase in (environmentally-aligned) government expenditure leads to a larger 0.0531 % decrease in emissions. ○ Surprising Interaction: The interaction between renewables and government spending has a small but significant positive effect on emissions. This suggests that if government spending is not targeted correctly (e.g., on fossil fuel subsidies), it can cancel out or dilute the benefits of renewable energy. • Other Drivers of Emissions: ○ GDP growth and energy use significantly increase emissions, supporting the Environmental Kuznets Curve (EKC) hypothesis. ○ Urbanization and education show mixed (inconclusive) effects. • Methodology: The research uses robust econometric models (Fixed-effects, Random-effects, and System GMM) on panel data from 26 LMICs over 20 years (2002–2022) to ensure reliable results. • Key Conclusion & Policy Implication: Success requires a dual strategy: ○ Expand renewable energy. ○ Ensure government fiscal policy is strategically aligned with environmental goals. Spending must be carefully targeted to support, not hinder, the green transition. • Contribution: Provides novel empirical evidence for policymakers in emerging economies on how to balance economic growth with climate change mitigation. Reducing CO₂ emissions poses a critical challenge for rapidly industrializing lower-middle-income countries (LMICs), where economic expansion pushes enhanced energy consumption, industrial activity, and transportation emissions. While previous research has separately examined the roles of renewable energy adoption and government spending in mitigating emissions, this study uniquely investigates their combined and interactive effects on CO₂ emissions in LMICs, providing novel empirical insights through dynamic analysis. This research employs panel data from 26 LMICs spanning 2002 to 2022, utilizing fixed-effects, random-effects, and generalized method of moments (GMM) approaches to address endogeneity, autocorrelation, and unobserved heterogeneity. The robust GMM estimators, handling these issues effectively, ensure reliable and complete causal inferences. The findings from the preferred GMM model indicate that a 1 % increase in renewable energy consumption results in a 0.025 % reduction in CO₂ emissions, but a 1 % rise in government expenditure contributes to a 0.0531 % decrease, when spending is environmentally aligned. However, the interaction term between renewable energy and government consumption demonstrates a small but significant positive effect, indicating that poorly targeted fiscal spending may dilute the environmental benefits of renewables. GDP growth and energy use dramatically rise emissions, supporting the Environmental Kuznets Curve (EKC) hypothesis, while urbanization and education show mixed effects. These results underscore the necessity of integrating renewable energy expansion with strategic government fiscal interventions to promote sustainable emission reductions. The study adds to the body of knowledge on sustainable development literature by elucidating the complex interplay between fiscal policy and renewable energy adoption. We recommend that policymakers in LMICs prioritize green-aligned spending and phase out fossil incentives to maximize synergies, fostering scalable models for global climate goals.