Towards a Sustainable Future: The Role of Technological Innovation and Digitalization in European Union Climate Change Mitigation

ABSTRACT Technological innovation and digitalization are widely viewed as key drivers of sustainable development, yet their effectiveness in reducing carbon emissions remains uncertain. This study examines how technological innovation, digitalization, energy structure, and economic activity shape both CO 2 emissions and total factor productivity in 22 European Union countries over 2000–2023. Using second‐generation heterogeneous panel estimators that account for cross‐sectional dependence and country‐specific heterogeneity, complemented by robustness checks, including kernel‐based methods and LASSO‐based variable selection, the analysis provides robust evidence on both country‐specific and system‐wide dynamics. The results show that the emission‐reducing effects of technological innovation and digitalization weaken substantially once common EU‐wide dynamics are controlled for, suggesting that much of their influence reflects shared trends rather than country‐specific effects. The productivity analysis further shows that innovation and digitalization do not automatically translate into higher TFP under energy‐intensive and environmentally constrained growth structures. These patterns reveal a complex relationship between technological advancement and environmental outcomes in the EU context. Overall, the findings suggest that sustainable development strategies should prioritize renewable energy expansion and structural transformation, with innovation and digitalization playing an enabling rather than standalone roles in decarbonization.