Does Finance Green the Energy Frontier? A DEA–Tobit Assessment of the European Union and Western Balkan Economies

This paper examines how financial development shapes total factor energy efficiency (TFEE) across the European Union (EU-27) and Western Balkans (WB-6) via a two-stage methodology. We develop DEA-based TFEE indicators from 2006 to 2021 via a window approach that reflects short- and medium-term changes. The production technique integrates primary energy, capital, and labor as inputs, with GDP as a desirable outcome and CO2 emissions as an undesirable output. In the second stage, we estimate a fixed-effects Tobit model that associates latent TFEE scores with standard and composite indices of financial and economic development, while accounting for unobserved country heterogeneity, common temporal shocks, and non-linearities in gross domestic product per capita. While similar Tobit frameworks have been implemented for EU-27, this represents the first case, to our knowledge, of estimating such a model for six Western Balkan countries within a unified EU–WB context. This extension is both methodological and substantive as it integrates the Western Balkans into the finance–energy efficiency discourse and offers policy-relevant evidence regarding the effectiveness of current financial architectures in the region in facilitating the transition mandated by the European Green Deal and the Green Agenda for the Western Balkans.