Growth Versus Green: How Financial Development and Energy Transition Shape Environmental Sustainability in Emerging Economies

Global carbon emissions are rising despite historic investments in renewables and net-zero pledges from nearly every economy. The current study examines the dynamic relationship between economic activities and environmental sustainability with reference to carbon emissions from emerging economies using the IPAT model utilizing panel data of 24 emerging economies from 2000 to 2019. Moreover, the study also used robust least square and fixed effect models for robustness purposes. The findings revealed that population (β = 0.103), economic growth (β = 1.090), financial development (β = 0.498), human capital (β = 1.073), and industrial structure (β = 0.158) are influential factors that significantly contributed to carbon emissions. In contrast, renewable energy transition (β = −0.375) has been identified as a mitigating factor that reduces emissions through the adoption of cleaner energy sources. This study provides empirical evidence to support the Environmental Kuznets Curve hypothesis, which states that economic development increases environmental pollution at the initial stage but fosters environmental improvements in later stages of economic growth. In addition, the econometric model for the moderating effect indicated that financial development reinforces the impacts of energy transition (from −0.141 to −0.201) in reducing emission levels, and significantly reduces the positive impact of human capital (from 0.931 to 0.503) and industrial structure (from 0.957 to 0.005). Therefore, green financial systems should be promoted to reduce carbon industries for sustainable economic growth and development, to assist in transitioning toward environmental sustainability in emerging economies.